M    t. 

2236 

V/5 


UC-NRLF 


LETTER  TO  THE  RAILROAD 
SECURITIES  COMMISSION 

IN  REPLY  TO  THEIR  REQUEST  FOR 
INFORMATION  AND  OPINIONS  UPON 
QUESTIONS  PERTAINING  TO  THE 


Issuance  of  Stocks  and  Bonds 


OF 


American  Railways 


BY 

W.  H.  WILLIAMS 

THIRD   VICE-PRESIDENT   OF 

THE  DELAWARE  AND  HUDSON  COMPANY 

NEW  YORK,  JANUARY  18,  1911 


THE  DELAWARE  AND  HUDSON  COMPANY, 

OFFICE  OF 
THE  THIRD  VICE-PRESIDENT, 

32  Nassau  Street,  New  York,  N.  Y. 

JANUARY  18,  1911. 

RAILROAD  SECURITIES  COMMISSION, 
Senate  Office  Building, 

Washington,  D.  C. 

Gentlemen  : 

In  accordance  with  your  letter  of  the  22nd  ulto., 
there  are  submitted  herewith  my  views  upon 
"  questions  pertaining  to  the  issuance  of  stocks 
and  bonds,"  by  American  railroads. 

FIRST. 

(a)  "  ADVISABILITY  OF  LIMITING  THE  ISSU- 

ANCE OF  CAPITAL  STOCK  AT  PAR  FOR  MONEY 
OR  PROPERTY  OF  THE  ACTUAL  VALUE  OF  THE 
PAR  OF  THE  STOCK  ISSUED. 

(b)  THE  SALE  OF  BONDS  AT  A  DISCOUNT. 

(c)  THE   SALE   OF  NEW  STOCK   AT  PAR  TO 
STOCKHOLDERS  WHEN  THE   OLD   STOCK  WAS 
SELLING  ABOVE  PAR  IN  THE   MARKET. 

(d)  THE     CAPITALIZATION     OF     BETTER- 
MENTS,    ADDITIONS     AND     EXTENSIONS 
CHARGED    IN    THE    PAST    TO     INCOME,    BUT 
WHICH    MIGHT    HAVE     BEEN     CHARGED    TO 
CAPITAL. 


M252359 


(<?)  THE  SUGGESTION  OF  THE  QUESTION 
OF  THE  MODE  OF  VALUATION  OF  THE  PHYSI- 
CAL AND  NON-PHYSICAL  PROPERTY  OF  RAIL- 
ROADS IN  EVENT  THE  VALUATION  OF  THE 
PROPERTY  OF  A  RAILROAD  IS  MADE  A  BASIS 
OF  CAPITALIZATION." 

All  of  these  questions  are  more  or  less 
dependent  upon  the  determination  of  the  rela- 
tion, if  any,  existing  between 

(1)  the  cost  price  of  material  in  place, 

(2)  the  par  value  of  securities  issued  and 

outstanding,  and 

(3)  the  present  value   (sometimes    called 

"fair  value")  of  the  property. 

The  original  cost  of  material  in  place  on  any 
one  railway,  must  be  a  definite  sum  although  it  is 
seldom  ascertainable  with  accuracy.  While  the 
aggregate  cost  may  increase  or  decrease  as  ma- 
terial is  added  or  withdrawn,  the  original  cost  of 
any  quantity  or  unit  of  material  in  place  is  per- 
manent. It  does  not  follow,  however,  that  the 
original  cost  of  material  in  place  represents  the 
cost  to  the  present  owners  of  the  property. 
They  may  have  purchased  the  property  from 
another  company,  and  paid  either  more  or  less 
than  the  cost  of  material  in  place.  The  price 
paid  in  such  a  case  is  the  resultant  of  many  con- 
ditions, including  the  necessities  of  the  seller 
and  the  respective  estimates  of  the  value  to 


themselves  of  the  property  made  by  both  parties 
to  the  transaction ;  but  the  original  cost  can 
never  be  one  of  the  controlling  conditions. 
There  are  few  existing  railway  companies  (and 
these  only  the  smaller  ones)  that  do  not  rep- 
resent reorganizations  following  receiverships,  or 
to  a  large  extent  the  purchases  of  properties  of 
other  companies  and  their  subsequent  merger 
or  consolidation  with  the  purchasing  company. 
In  view  of  these  facts  it  is  plain  that  there  is  no 
fixed  necessary  or  common  relation  between  the 
"  cost  of  material  in  place  "  and  the  "  cost  of  the 
property  to  the  present  holders  thereof." 

The  aggregate  par  value  of  securities  is  con- 
trolled by  (a)  the  "  cost  of  the  property  to  the 
present  holders  thereof,"  and  (b)  by  the  rate  at 
which  they  will  be  accepted  in  payment  therefor 
by  the  sellers,  or  at  which  they  can  be  sold  for  the 
cash  needed  to  pay  the  purchase  price.  It  may 
be  concluded,  therefore,  that  there  is  not,  nor  can 
there  be,  any  definite  and  fixed  relation  between 
any  two  of  the  three  items. 

Property  without  the  right  of  use  has  no  value. 
Value  begins  with  use  and  increases  as  use 
increases..  It  is  dependent  upon  the  right  of 
use,  and  is  controlled  by  the  extent  of  use.  The 
value  of  a  railway,  therefore,  is  not  constant, 
and  may  be  subject  to  frequent  and  to  violent 
fluctuations. 


The  present  value  of  the  property  is  its  value 
in  use  and  so  cannot  be  fixed  by  the  aggregate 
par  value  of  securities  issued  and  outstanding, 
or  by  the  original  cost  of  material  in  place,  nor 
would  the  fact  be  otherwise  were  stock  and 
bonds  to  be  issued  at  par  (with  neither  a  discount 
nor  a  premium)  and  were  all  additions  and  bet- 
terments and  all  extensions  paid  for  by  the 
issue  at  par  of  capital  securities.  The  par  value 
of  securities  issued  is  the  consequence  of  past 
transactions  and  so  cannot  be  controlled  by  so  tem- 
porary and  fluctuating  a  fact  as  "  present  value," 
but  these  transactions  are  too  remote  from  orig- 
inal cost  to  have  been  controlled  thereby  and 
"  the  cost  price  of  material  in  place  "  being  ante- 
cedent to  both  of  the  other  facts  could,  of  course, 
be  controlled  by  neither.  The  suggestion  that 
value  in  use  can  be  increased  or  diminished  by 
issuing  or  declining  to  issue  new  securities  in 
any  amount  needs  only  to  be  stated  in  order  that 
its  absurdity  shall  be  recognized. 

Unfortunately  economic  terminology,  not  al- 
ways evolved  in  the  light  of  intimate  association 
with  the  facts,  has  seemed  to  make  "  capitaliza- 
tion "  synonymous  with  par  value  of  "  capital 
securities  issued."  But  in  ordinary  practice,  and 
in  fact,  there  is  a  distinction  of  which  it  is  im- 
portant to  take  full  cognizance.  Capitalization 
is  the  amount  at  which  the  property  is  carried 


on  the  books ;  that  is,  in  the  capital  account. 
It  may  be  said  to  include  all  of  the  assets.  The 
property  may  be  paid  for  by  the  issue  of  secur- 
ities either  at  par,  at  a  discount,  or  at  a  premium, 
also  by  the  reinvestment  of  the  net  income. 
For  illustration,  if  (x)  $1,000,000  par  value  of 
capital  securities  be  sold  at  a  premium  of  50  per 
cent,  there  would  be  realized  (y)  $1,500,000 cash; 
in  which  case  the  "Capitalization"  would  be 
$1,500,000,  while  the  "  Capital  Securities  "  out- 
standing would  be  $1,000,000.  If  subsequently 
additional  property  aggregating  (2)  $500,000  be 
paid  out  of  earnings  or  income  and  not  capitalized, 
we  would  have  as  , 

(x)  Capital  securities  (or  Capi- 
tal Liabilities) $1,000,000 

(y)  Capitalization  (book  cost 

of  property) 1,500,000 

(2)  Cost  of  property  to  present 

holders. 2,000,000 

In  the  case  of  a  premium  on  securities  there 
is  an  excess  of  "  Capitalization "  over  "  capital 
securities";  and  in  the  case  of  property  paid 
for  out  of  earnings  or  income  there  is  an  ex- 
cess of  "cost  of  material  in  place"  over  both 
"capitalization"  and  "capital  securities"  which 
would  not  commonly  be  revealed  by  a  superficial 
examination  of  the  accounts.  Confusion  of  these 
terms  has  caused  much  misunderstanding  of  rail- 


way  questions.  The  difficulty  can  be  largely 
overcome  by  assuming,  for  the  moment,  that  the 
ownership  of  the  railway  rests  with  a  "joint 
partnership, "  and  not  with  a  "  stock  corporation." 
No  one  would  attempt  to  say  that  a  one-twentieth 
interest  in  a  joint  partnership  is  worth  no  more 
and  no  less  than  the  investment  at  the  time  the 
partnership  was  formed.  The  same  is  true  of  a 
stock  corporation,  and  the  par  value  of  the 
capital  securities  does  no  more  than  put  in 
recognized  form  the  agreement  among  the 
owners  of  all  securities,  and  of  different  grades 
of  securities,  as  to  the  terms  on  which  they  will 
share  the  losses  or  profits  of  the  undertaking. 

Just  as  a  man  may  own  a  "  limited  "  or  "special" 
partnership  in  a  firm,  so  may  his  interest  in  a 
stock  corporation  be  one  of  several  limited  or  spe- 
cial classes.  Some  limited  partnerships  provide 
for  a  fixed  or  limited  annual  return  with  no  active 
voice  in  the  actual  management  of  the  firm,  and 
as  representing  this  class  we  have  the  bond- 
holders of  the  railway.  As  the  other  partners 
assume  the  greater  and  more  immediate  risks  of 
losses  and  receive  all  profits  above  the  annual 
amount  paid  to  the  limited  partnerships,  so  in 
like  manner  the  stockholders  assume  the  more 
imminent  risks  of  losses  and  receive  all  profits 
represented  by  the  excess  of  earnings  on  capital 
over  the  interest  on  bonds,  including  any  excess 


of  earnings  on  improvements  paid  for  from  the 
proceeds  from  sale  of  bonds  over  and  above  the 
interest  on  the  said  bonds. 

Stated  in  another  way,  the  book  assets  (or  capi- 
talization) of  a  corporation  represent  property; 
the  liabilities  (including  securities)  denote  the 
ownership  and  relative  equities  of  the  several 
classes  of  owners. 

The  question  whether  new  capital  shall  be 
raised  through  the  issue  of  stock  or  of  bonds  is 
largely  dependent  upon  general  market  condi- 
tions and  the  credit  of  the  company.  Formerly, 
our  life  insurance  companies  could  purchase 
stocks,  but  the  present  insurance  laws  of  New 
York  prohibit  the  ownership  of  stocks.  This 
has  resulted  in  a  material  reduction  in  a  special 
market  formerly  existing  for  railroad  securities, 
and  has  caused  the  sale  in  a  smaller  market  of 
not  only  the  new  issues  of  stocks  but  also  some 
of  old  issues  held  by  the  insurance  companies. 
This  undoubtedly  resulted  in  increasing  the 
issue  of  bonds  and  decreasing  the  issue  of 
stocks.  Whether  the  market  will  adjust  itself 
to  the  new  conditions  sufficiently  to  permit  of  a 
greater  proportion  of  new  work  being  financed 
through  issue  of  stocks  instead  of  bonds  is  yet 
to  be  determined. 

American  railways  must  satisfy  their  capital 
requirements  through  appeals  to  either  European 


or  domestic  investors.  The  dominant  factor  in 
the  domestic  investment  market  for  railway 
securities  is  the  investment  demand  of  savings 
banks,  6»o  and'  life  insurance  companies  and 
those  controlling  trust  funds.  This  demand  is, 
in  a  very  large  extent,  regulated  by  statutes,  and 
this  sort  of  legislative  regulation  has  a  direct 
and  very  marked  effect  upon  the  methods  of 
corporate  financing  adopted  by  railway  com- 
panies. For  example,  the  statutes  of  New  York 
and  Massachusetts  permit  investments  by  the 
institutions  and  trustees  in  securities  of  railways 
but  not  of  industrial  corporations.  These  inves- 
tors cannot,  however,  purchase  all  classes  of  rail- 
way securities,  even  though  issued  by  companies 
of  exceptionally  high  credit,  nor  can  they  pur- 
chase any  class  of  securities  of  those  companies 
whose  financial  situation  does  not  meet  the 
requirements  of  the  law.  Collateral  and  income 
bonds  c^inot  be  purchased ;  the  gross  earnings 
of  the  companies  whose  securities  can  be  pur- 
chased must  not  be  less  than  five  times  the  interest 
and  rentals,  and  generally  the  companies  must 
have  paid  the  interest  on  their  bonds  and  dividends 
of  not  less  than  four  per  cent,  per  annum  on  capital 
stock  of  a  par  value  of  not  less  than  one-third  of 
the  par  value  of  bonds  outstanding,  and  for  New 
York  State  such  interest  and  dividends  must 
have  been  paid  for  not  less  than  the  preceding 


five  consecutive  years,  and  in  Massachusetts  for 
not  less  than  the  preceding  ten  consecutive  years. 
Similar  statutory  regulations  exist  in  Connec- 
ticut and  New  Jersey  and  probably  elsewhere. 
A  very  large  proportion  of  the  bonds  of  the 
railroads  is  owned  by  this  class  of  investors. 

The  direct  influence  on  the  methods  of  financ- 
ing adopted  by  the  railways  attributable  to  this 
sort  of  regulation,  although  somewhat  less  exten- 
sive in  degrees,  is  precisely  similar  to  the  influence 
upon  the  market  for  United  States  bonds  of  the 
laws  governing  the  note  issues  (circulation)  of 
National  banks.  Although  the  railway  securities 
admitted  to  this  special  investment  market  can 
also  be  sold  in  every  other  market,  in  competi- 
tion with  other  securities  not  admitted  to  the  re- 
stricted market,  access  to  the  restricted  market  is 
a  privilege  having  such  distinct  value  that  no 
railway  which  is  in  a  position  to  meet  the  require- 
ments can  afford  to  neglect  to  satisfy  them. 

The  fact  that  a  security  does  satisfy  the 
rigorous  requirements  of  these  statutes  also 
tends  strongly  to  broaden  its  market  among 
the  considerable  class  of  investors  who  might 
lawfully  purchase  other  securities  but  whose 
conservative  management  of  their  investments 
leads  them  to  give  the  preference  to  what  are 
commonly  known  as  "savings  bank"  securities. 
In  other  words,  many  investors  whose  purchases, 


10 


unlike  those  of  savings  banks,  insurance  com- 
panies and  trustees,  are  not  restricted  by  statutes, 
voluntarily  subject  themselves  to  about  the  same 
restrictions. 

In  a  similar  manner  the  investment  market 
is  affected  by  the  rules  of  the  great  Ex- 
changes in  which  bonds  and  shares  are  bought 
and  sold  and  the  more  or  less  self-imposed  re- 
strictions of  the  principal  banking  institutions. 
Bankers  readily  loan  their  funds  on  collateral, 
consisting  of  securities  listed  on  the  New  York 
Stock  Exchange,  while  some  refuse  to  loan  on 
other  collateral,  and  all  refuse  to  do  so  until 
some  investigation  can  be  made  of  the  financial 
status  of  the  company  issuing  the  securities,  so 
that  the  listing  of  securities  on  the  New  York 
Stock  Exchange  may  be  said  favorably  to  affect 
their  market  value.  In  like  manner  the  listing 
on  the  London  Exchange  or  the  Paris  Bourse 
tends  to  broaden  the  market  for  securities. 

Some  of  the  states  now  exercise  supervision 
over  issues  of  capital  securities  of  railway  com- 
panies— but  it  can  be  said,  without  fear  of  any 
well  founded  contradiction,  that  it  is  not  their 
favorable  action  which  secures  an  " investment" 
market  for  the  securities,  but  compliance  with 
the  statutory  regulations  of  the  investments  of 
the  funds  of  savings  banks,  trustees,  fire  and 
life  insurance  companies,  etc.  In  fact  securities 


II 


available  to  such  purchasers  constitute  all  the 
railway  securities  commonly  known  as  "  invest- 
ment securities ",  while  other  securities  issued 
by  these  same  companies  which  fail  to  meet  the 
statutory  requirements  only  by  reason  of  the 
"  class  "  of  the  securities  (for  example,  collateral 
trust  bonds)  form  the  semi-investment  class.  All 
other  railway  securities  may  be  said  to  be  more 
or  less  "  speculative  ". 

With  these  preliminary  remarks,  the  five 
matters  suggested  by  the  Commission  will  now 
be  separately  treated. 

(a)  THE  SALE  OF  SHARES  AT  LESS  THAN  PAR, 
WHEN  NECESSARY,  OUGHT  NOT  TO  BE 
PROHIBITED. 

Inasmuch  as  capital  securities  bear  no  fixed 
relation  to  value  in  use,  or  the  "fair  value "  of 
the  property,  and  can  in  no  conceivable  way 
control  or  affect  such  value,  the  security  holders 
of  a  corporation  are  the  only  ones  directly  inter- 
ested in  the  volume  or  in  the  price  at  which 
additional  securities  are  sold.  These  are  ques- 
tions to  be  determined  by  the  present  owners  (or 
partners)  and  the  new  partners  they  have  invited 
to  join  them ;  and  the  Government  should  do  no 
more  than  to  see  that  the  facts  are  not  intention- 
ally or  wrongfully  misrepresented.  This  is  now 
secured,  so  far  as  railroad  securities  are  con- 
cerned, through  a  uniform  system  of  accounts 


12 


and  the  publicity  given  to  the  results  of  opera- 
tions through  the  annual,  monthly  and  special 
reports  to  the  Interstate  Commerce  Commission, 
as  well  as  by  the  periodical  inspection  by  the 
examiners  of  the  Commission  of  the  accounts  of 
the  carriers. 

With  the  exception  of  the  very  small  railways 
which  are  financed  in  the  local  communities  they 
serve,  it  is  undoubtedly  true  that  the  stock  of  a 
railway  cannot  be  sold  at  par  or  better  unless  its 
securities  meet  requirements  of  the  savings 
bank  and  insurance  laws  of  New  York  and 
Massachusetts  and  are  listed  on  the  New  York 
Stock  Exchange.  Therefore,  to  say  that  stock 
must  not  be  issued  at  less  than  par  is  to  say 
that  where  the  credit  of  a  company  is  impaired 
it  cannot  admit  new  general  partners  into  the 
enterprise,  but  must  raise  the  needed  additional 
capital  by  the  issue  of  bonds  or  notes  carrying 
annual  interest  charges ;  even  though  these 
additional  fixed  charges  cause  a  further  impair- 
ment of  the  credit  of  the  company,  thus  render- 
ing even  more  difficult  any  future  financing,  as 
well  as  the  rendering  of  satisfactory  service  and 
the  payment  of  fair  wages  to  employees. 

Having  in  mind  what  has  been  said  above  re- 
garding the  parties  who  are  directly  interested  in 
the  securities  outstanding,  there  would  appear  to 
be  no  reasonable  objection  to  the  issue  of  stock 


13 

at  less  than  par,  provided  it  be  not  unfair  to  the 
existing  stockholders — in  other  words,  that  the 
old  and  the  new  stockholders  be  placed  on  an 
equal  footing,  and  generally  new  stock  must  be 
offered  pro  rata  to  the  existing  stockholders. 

To  say  that  capital  stock  must  be  issued  "  at 
par  for  money  or  property  of  the  actual  value  of 
the  par  of  the  stock  issued  "  is  to  differentiate  as 
between  the  methods  under  which  the  capital  is 
secured. 

For  example,  Road  "A"  can  build  Road  "B" 
for  $1,000,000,  but  the  capital  stock  of  Road  "A" 
to-day  can  be  sold  at  only  $90  per  share  having 
a  par  value  of  $100,  thus  requiring  the  issuance 
of  capital  stock  of  Road  "  A  "  of  an  aggregate 
par  value  of$i,iii,m.  Unless  sale  of  stock  at 
a  discount  be  permitted,  Road  UA"  could  not 
build  Road  "  B  "  and  finance  it  by  the  issue  of 
additional  capital  stock  of  Road  u  A." 

However,  if  others  build  Road  "B",  and  the 
traffic  handled  over  it  as  well  as  the  traffic  it  could 
have  routed  via  Road  "  A  "  would  increase  the 
net  operating  income  of  the  two  roads  sufficient 
to  earn  say  9  per  cent,  on  the  cost  of  Road  "  B  ", 
the  value  to  Road  "  A  "  of  Road  u  B  "  would  be 
greater  than  the  original  cost  of  Road  "  B  "  and 
sufficient  to  pay  6  per  cent,  on  $1,500,000.  In 
other  words,  to  say  that  stock  must  be  issued 
at  par  would  be  equivalent  to  saying  that 


14 

Road  "A"  could  not  issue  $i,iii,m  par 
value  of  its  capital  stock  to  build  a  road  costing 
$1,000,000  and  securing  to  Road  "  A J>  an 
increase  in  its  net  operating  income  equiva- 
lent to  9  per  cent,  on  said  $1,000,000,  cost  of 
material  in  place,  or  8.1  per  cent,  on  $i,iii,m 
par  value  of  securities  sold  for  $1,000,000  cash; 
but  that  after  the  building  of  the  road  by  others 
Road  "A"  could  then  issue  $1,500,000  par  value 
of  its  capital  stock  to  buy  the  new  road  if  it  had 
that  value. 

The  alternative  would  be  to  issue  bonds  at  a 
discount,  but  all  the  bonds  authorized  under 
existing  mortgages  may  have  been  issued,  neces- 
sitating the  issue  of  a  junior  (or  inferior)  bond 
which  could  not  be  marketed  to  advantage ;  or 
it  may  be  that  to  issue  additional  bonds  would 
cause  the  total  amount  outstanding  to  be  in 
excess  of  the  percentage  of  bonds  to  capital  stock 
outstanding  permitted  by  the  savings  bank  laws 
previously  mentioned. 

(b)    THE   SALE   OF   BONDS  AT  A  DISCOUNT  WHEN 
NECESSARY  OUGHT  NOT  TO  BE  PROHIBITED. 

Bonds  are  sold  under  terms  and  conditions  of 
the  mortgage  securing  them.  The  mortgages  of 
recent  date  mature  in  twenty-five  to  fifty  years 
from  the  date  of  their  execution,  and  any  future 
issues  of  bonds  secured  by  such  mortgages  must 


15 

be  under  the  terms  and  conditions  set  forth  in 
the  mortgages.  Among  other  things,  the  rate 
of  interest  is  mentioned  and  the  maximum 
rate  is  fixed.  Therefore,  the  question  whether 
the  bonds  can  be  sold  at  par  or  better  will 
depend  upon  the  state  of  the  market,  the  con- 
ditions of  the  investment,  and  the  credit  of  the 
company.  If  buyers  at  par  cannot  be  obtained, 
a  lower  price  must  be  accepted  or  the  money 
provided  in  some  other  way,  or  the  improvements 
needed  to  render  satisfactory  service  and  operate 
the  property  economically  will  be  seriously 
retarded.  This  is  especially  true  in  times 
like  the  present,  when  there  is  no  market  for 
new  issues  of  stock  and  only  a  very  limited 
market  for  new  issues  of  bonds. 

Those  objecting  to  the  sale  of  bonds  at  a 
discount,  who  claim  that  instead  of  selling  a 
4^  per  cent,  bond  at  90,  the  company  should 
sell  a  5  per  cent,  bond  at  100  (par),  can  have 
had  no  financial  experience,  and  are  not  fully 
competent  to  pass  judgment  on  this  question. 
From  personal  experience,  the  writer  knows 
that  a  5  per  cent,  bond  cannot  be  sold  at  par 
when  a  4^2  per  cent,  bond  of  the  same  company 
can  be  sold  at  90.  The  5  per  cent,  bond  could 
not  be  sold  for  more  than  97  or  98.  The  ques- 
tion of  yield  is  the  principal  consideration  with 
the  investor  and  he  is  not  so  dull  of  comprehen- 


i6 

sion  as  to  be  unaware  that  when  he  obtains  a 
promise  to  pay  $1,000  for  $900  he  has  some- 
thing very  substantial  to  add  to  the  annual 
interest  payments.  Nor  do  the  financial  managers 
of  the  companies  overlook  the  fact  that  a  charge 
equal  to  that  necessary  to  provide  a  sinking 
fund,  equivalent  at  the  end  of  the  period  when  the 
bonds  mature  to  the  amount  of  the  discount,  is  a 
necessary  addition  to  the  annual  interest  charges 
before  the  true  cost  of  the  loan  can  be  ascertained. 
The  present  instructions  of  the  Interstate 
Commerce  Commission  permit  of  the  capitaliza- 
tion of  banker's  commission  if  paid  in  the  form 
of  a  commission,  but  do  not  permit  capitalization 
of  commissions  paid  in  the  form  of  discount.  In 
other  words,  bonds  can  be  sold  at  par  and  a 
discount  of  two  or  three  per  cent,  paid  the 
banker  for  their  sale,  thus  netting  the  company 
only  ninety-seven  or  ninety-eight  per  cent.,  and 
the  commission  charged  to  capital  account.  On 
the  other  hand,  the  Commission's  instructions 
forbid  the  capitalization  of  this  commission  when 
paid  in  the  form  of  a  discount  and  the  bonds  are 
actually  sold  at  ninety-seven  or  ninety-eight 
per  cent,  of  their  value.  Thus  it  is  the  method 
and  not  the  result  that  is  affected.  The  out- 
right sale  of  the  securities  at  a  discount  is  better 
from  the  standpoint  of  protecting  the  credit  of  the 
company  than  their  sale  at  its  risk  through  pay- 


17 

inent  of  a  fixed  commission.  In  the  latter  case 
the  company  receives  payment  for  the  securities 
only  as  they  are  sold,  though  its  financial  needs 
may  make  immediate  availability  of  the  funds 
realized  most  necessary  or  desirable,  and  although 
this  result  could  be  secured  only  through  out- 
right sale. 

The  amount  of  the  discount  must  be  commen- 
surate with  the  risk  and  depends  upon  the 
market  in  which  the  securities  are  sold.  On 
high  grade  securities  the  allowance  to  the 
bankers  financing  security  issues  in  New 
York  ranges  from  two  to  three  per  cent. ; 
in  London  it  is  six  per  cent.,  and  in  Paris  ap- 
proximately ten  per  cent.  Few,  if  any,  American 
railways  have  important  banking  connections 
in  either  London  or  Paris.  Therefore  sales  in 
those  markets  must  be  arranged  through  New 
York  banking  houses,  necessitating  the  payments 
of  commissions  to  the  New  York  bankers  as  well 
as  to  the  London  or  Paris  bankers.  In  addition, 
there  must  be  paid  the  cost  of  listing  the  securities 
on  the  London  Exchange  or  the  Paris  Bourse,  the 
English  or  French  tax  and  other  charges  which 
the  laws  of  those  countries  require  to  be  paid 
before  securities  are  offered  for  sale.  Whether 
securities  shall  be  marketed  through  New  York, 
London  or  Paris  depends  upon  the  financial  con- 
dition in  these  markets,  etc. 


i8 

Bankers  are  constantly  in  touch  with  the  in- 
vesting public,  while  the  railroads  are  not,  as  the 
sales  of  securities  by  any  one  Company  occur 
only  at  infrequent  intervals.  Therefore  the  net 
amount  received  from  sales  handled  by  bankers 
is  more  than  is  likely  to  be  had  if  the  railroad 
attempt  to  sell  direct.  Furthermore,  the  banker 
guarantees  the  success  of  the  undertaking  by  tak- 
ing all  securities  not  sold  to  others,  while  a  failure 
to  place  the  securities  might  seriously  impair 
the  credit  of  the  company,  so  that  the  successful 
outcome  of  the  undertaking  is  essential  to  the 
future  development  of  the  road  and  the  financing 
of  the  cost. 

(c)  IT  IS  NOT  IMPROPER  TO  SELL  STOCK  TO 
STOCKHOLDERS  AT  PAR  WHEN  THE  MAR- 
KET QUOTATIONS  ARE  HIGHER. 

The  quotations  representing  actual  sales  and 
purchases  of  active  securities,  handled  in  large 
quantities,  in  a  principal  market  such  as  the  New 
York  Stock  Exchange,  or,  under  normal  condi- 
tions, are  of  considerable  significance  as  indicating 
the  real  value  of  those  portions  of  the  total  issues 
which  are,  in  common  parlance,  "on  the  Ex- 
change," that  is  to  say  of  the  large  or  small 
blocks  of  shares  or  bonds  which  are  currently  in 
the  hands  of  brokers  or  others  to  be  sold  and 
bought  as  the  hourly  and  daily  fluctuations  may 
seem  to  afford  opportunity  for  profit.  In  the 


19 

case  of  nearly  every  railway,  if  not  in  that  of  all 
railways,  the  proportion  of  any  of  its  issues  that 
is  thus  "on  the  Exchange"  is  relatively  small. 
Experience  has  repeatedly  and  abundantly  dem- 
onstrated that  when  pressure  to  sell  or  to  buy 
extends  beyond  the  limited  volume  of  this  cur- 
rent supply  the  previously  existing  quotations 
afford  little  indication  of  the  prices  at  which  the 
larger  quantity  can  be  marketed  or  purchased. 
When  new  shares  of  stock  are  issued  to  satisfy 
capital  requirements  these  requirements  are 
usually  immediate  and  pressing,  and  so  exten- 
sive in  amount  that  the  sale  of  the  new 
stock  upon  the  market  if  not  impracticable 
entirely,  would  at  least  depress  the  price  to  an 
extent  which  it  would  be  simply  impossible  to 
estimate  in  advance.  In  other  words,  the  current 
quotations  based  upon  the  small  value  of  the 
existing  issue  actually  available  for  stock 
exchange  dealings  affords  no  indication  of  the 
price  which  could  be  obtained  were  the  whole 
new  issue  thrown  upon  the  market.  Certainly 
no  one  would  suggest  that  under  these  circum- 
stances the  railway  company  should  undertake 
the  difficult  and  doubtful  task  of  market  manipu- 
lation, involving  purchases  as  well  as  sales, 
sometimes  resorted  to  by  other  interests  (and 
not  always  with  success)  in  order  to  "feed  out" 
to  the  market,  little  by  little,  a  large  block  of 


20 


securities  which  could  not  be  satisfactorily  sold 
on  a  normal  or  natural  market.  An  offer  to 
shareholders  to  sell  to  them  at  par  or  at 
least  at  some  figure  below  the  current  quota- 
tions, new  shares  in  a  stated  proportion  to  those 
they  already  hold  is,  under  such  conditions, 
merely  a  proper  and  natural  expedient  to  obtain 
the  new  capital  in  an  orderly  and  effective  way 
and  to  obtain  for  the  new  issue  the  highest 
reasonable  price  which  market  conditions  justify. 
The  price  thus  obtained  is  often  and  probably 
in  most  instances  considerably  higher  than  would 
be  secured  if  the  whole  issue  were  submitted  to 
the  action  of  the  Exchange.  Two  great  railway 
companies  that  had  for  some  time  paid  regular 
dividends  of  six  per  cent.,  or  more,  on  their 
shares  which  had  not  been  quoted  as  low  as  par 
for  many  years,  recently  tried  unsuccessfully 
to  sell  new  issues  to  their  shareholders  at  a 
premium,  though  below  the  then  current  quota- 
tions, and  were  finally  obliged,  in  order  to  obtain 
new  capital  that  they  could  not  do  without,  to 
sell  at  par  the  new  issues  to  their  shareholders. 

The  writer  already  has  expressed  the  opinion 
that  "the  security  holders  of  a  corporation  are 
the  only  ones  directly  interested  in  the  price 
at  which  additional  securities  are  sold."  The 
stockholders'  relative  interest  in  the  property 
as  between  themselves  is  neither  increased 
nor  decreased  by  the  issue  to  themselves 


21 


of  additional  stock,  whether  below  par,  at  par, 
or  above  par — the  only  resulting  changes  being 
in  the  fractional  ownership  of  the  whole  repre- 
sented by  the  certificates,  each  having  a  nominal 
par  value  of  $100.  Again,  for  illustration, 
assume  the  ownership  to  rest  with  a  joint 
partnership  consisting  of  ten  partners  investing 
$100,000  each,  or  a  total  of  $1,000,000,  that 
the  present  market  value  of  the  whole  as  a 
going  concern  is  $[,500,000,  and  that  $500,000 
additional  is  to  be  put  into  the  enterprise,  bring- 
ing the  total  up  to  $2,000,000.  It  matters  not 
whether  the  $500,000  be  raised  by  each  partner 
investing  an  additional  $50,000  and  continuing 
to  own  a  one-tenth,  or  four-fortieths  interest,  or 
whether  the  money  be  raised  by  the  sale  of  a 
one-fourth  interest  to  new  partners,  each  of 
the  original  partners  retaining  only  a  three- 
fortieths  interest,  or,  to  arrive  at  the  same  result, 
each  partner  can  invest  an  additional  $50,000 
and  subsequently  they  can  each  sell  to  others  a 
one-fourth  interest.  Whichever  way  it  is  done, 
the  persons  investing  the  additional  $500,000 
will  be  entitled  to  a  one-fourth  interest  in  the 
property,  that  is,  the  fractional  ownership  will 
have  for  the  denominator  the  value  of  the  prop- 
erty plus  the  new  capital  invested,  and  not  the 
original  capital  invested  plus  the  new  capital 
invested;  and  for  an  original  investment  equiv- 


22 


alent  to  one-half  of  the  new  value,  the  original 
partners  still  secure  a  three-fourths  ownership. 
Each  of  the  original  partners  can  subsequently 
sell  another  quarter  interest,  retaining  the  money 
personally,  and  then  have  an  interest  in  the 
property  with  a  market  value  equivalent  to  the 
original  investment,  and  with  a  cash  profit  for 
his  personal  use  of  $50,000. 

The  result  is  identical  with  a  stock  corpora- 
tion— the  individual  ownership  instead  of  being 
expressed  in  fractions  being  stated  as  shares  at  a 
nominal  par  value  of  $100  each.  In  a  company 
with  outstanding  capital  stock  of  $1,000,000  each 
holder  of  one  share  of  stock  owns  TTRRRJ  of  the 
property. 

A  wrong  can  be  done  only  by  the  sale  to  others 
than  the  stockholders  of  new  stock  at  less  than 
its  real  market  value.  However,  as  the  capital 
stock  cannot  be  increased  without  the  consent  of 
the  stockholders  (usually  by  a  two-thirds  vote), 
and  since  new  stock  must  be  first  offered  to  the 
existing  stockholders,  their  interests  appear  to 
be  amply  protected. 

Stockholders  are  constitutionally  entitled  to 
not  less  than  a  fair  return  upon  the  value  of  the 
property,  provided  the  rates  are  reasonable  in 
view  of  the  service.  In  other  words,  they  are  the 
owners  of  the  whole  property  as  a  going  concern 
(not  merely  of  the  material  in  place  with  no  right 


23 

of  use)  and  as  the  use  increases  so  does  the  value 
of  their  ownership  increase.  No  portion  of  such 
ownership  can  be  taken  from  them  legally  without 
payment  for  its  market  value. 

The  possibility  of  increased  dividends  from 
time  to  time  gives  to  such  stock  a  speculative 
value  not  enjoyed  by  bonds  having  a  fixed  rate 
of  return  and  no  participation  in  the  profits.  It 
is  this  "  speculative  "  value  which  at  times  causes 
the  market  prices  of  securities  of  several  cor- 
porations to  be  so  at  variance  with  the  yields  on 
the  respective  securities. 

A  study  of  the  factors  governing  value  will 
fully  confirm  the  rights  of  the  stockholder  to  any 
and  all  profits,  viz. : 

1.  The  equities  between  different  classes  of 
security  holders  are  so  arranged  that  almost 
the  whole  risk  of  loss  is  borne  by  the  stock- 
holders,   who    are   also    charged    with   the 
burdens    of    management.     Are   not    those 
who  bear  the  risks  entitled  to  the  profits  ? 

2.  The  reinvestment  in   the  property   of    a 
portion  or  all  of   the  net  income  is  at  the 
expense  of  the  stockholders,  and  increases 
the  value  of  the  property. 

3 .  The  previous  sale  of  securities  at  a  premium 
tends  to  cause  the  market  price  to  exceed  the 
par  value  of  securities  outstanding. 


24 

4.  Increments  earned  and  unearned, — being 
the  enhancement  of  values  due  to  the  collec- 
tive  energies   of  two   or   more   persons    or 
communities,  over  and  above  the  value  due 
to  the  individual  efforts  of    each, — are    the 
rewards  of  risks  assumed. 

Such  increments  are  those  that  character- 
ize the  steady  upward  movement  in  prices  of 
well-located  real  estate.  Remove  a  man's 
neighbors  and  the  value  of  his  property  is 
reduced,  though  no  change  in  design, 
material  or  use  of  his  property  has  been 
made. 

This  increment  is  unearned  wholly,  or  in 
part,  only  when  the  proprietor  has  not 
contributed  his  full  share  to  the  development 
of  the  community. 

A  study  of  values  prior  and  subsequent  to 
the  construction  of  a  railway  will  disclose 
the  fact  that  every  railway  does  its  full  share 
in  the  development  of  the  communities  it 
serves,  and  such  increments  are  fully  earned. 

5.  Profits  from  leases  and  operation  of  proper- 
ties not  owned. 

6.  Compensation  for  additional  risk  due  to 
guaranteeing  to  "limited"   partners  (bond- 
holders) stipulated  annual  returns. 

For  illustration :  There  are  two  railroads, 
each  costing  $200,000,000  and  each  having 
net  income  from  operations  equivalent  to 
$9,000,000  per  year.  Road  "A"  however,  is 
financed  through  the  issue  of  $100,000,000 


25 

par  value  of  4  per  cent,  mortgage  bonds  and 
$100,000,000  par  value  of  capital  stock  ;  while 
Road  "B"  is  financed  through  the  issue  of 
$200,000,000  of  capital  stock. 

Road  "A"  after  paying  $4,000,000  in- 
terest on  its  mortgage  bonds,  will  have 
$5,000,000  available  for  dividends,  or  5  per 
cent,  on  its  $100,000,000  outstanding  capital 
stock  ;  while  Road  "  B,"  not  having  any  in- 
terest to  pay,  will  have  $9,000,000  available 
for  dividends,  or  only  4^  per  cent,  on  its  out- 
standing $200,000,000  of  capital  stock. 
Interest  must  be  paid  whether  or  not  it  is 
earned  ;  but  there  are  no  statutory  require- 
ments that  dividends  must  be  paid  when 
earned, — only  that  they  cannot  be  paid  unless 
they  are  earned. 

Had  the  net  operating  income  of  the  Roads 
"A"  and  "B"  been  each  $4,000,000,  Road 
UA"  would  have  had  no  money  available 
for  dividends,  while  Road  "B"  would  have 
earned  2  per  cent,  on  its  outstanding  capital 
stock. 

(a)  While  every  one  knows  this,  it 
seems  well  to  show  this  in  complete  form 
as  is  done  in  the  following  table,  which 
assumes  that  the  total  property  account 
(capitalization)  amounts  to  $100,000,000, 
and  shows  how  a  return  of  6  per  cent,  on 
that  property,  or  $6,000,000,  would  be  ap- 
portioned between  Bonds  and  Stock,  with 
Bonds  say  at  4  per  cent.,  when  the  Bonds 


26 


and  Stock  have  varying  relations  to  each 
other  : 

Say  total  property,   $100,000,000  earns 
6  per  cent,  or  $6,000,000  per  annum. 


4%  Bonds. 

Interest  on 
Bonds. 

Stock. 

Balance 
Available  for» 
Dividends. 

%on 
Stock. 

10  %  of  Property 

$4OO,OOO 

90%  of  Property 

$5,600,000 

6.22 

20% 

8oo,OOO 

80%  " 

5,2OO,OOO 

6.50 

30% 

I,2OO,OOO 

70%  " 

4,800,000 

6.86 

W% 

I,6oo,OOO 

60%    ' 

4,400,000 

7-33 

50% 

2,OOO,OOO 

50%    ' 

4,OOO,COO 

8.00 

60  % 

2,4OO,OOO 

40^    ' 

3,6oo,OOO 

9.00 

10% 

2,800,000 

30%    ' 

3,200,000 

10.66 

80% 

3,2CO,OOO 

20%      ' 

2,8oo,OOO 

14.00 

90* 

3,600,000 

10%    " 

2,4OO,OOO 

24.00 

(b)  Assuming,  however,  a  portion  of 
the  earnings  be  reinvested  in  the  property, 
annually,  until  they  aggregate  $50,000,000. 
Then  we  have : 

Total  property,  $150,000,000, 
Stocks  and  bonds,  $100,000,000, 

At  6  per  cent,  on  total  property,  return 
would  be  $9,000,000  per  annum. 


4%  Bonds. 

Interest  on 
Bonds. 

Stock. 

Balance 
Available  for 
Dividends. 

%on 
Stock. 

\o%  of  Securities 

$4OO,OOO 

90%  of  Securities 

$8,6oo,000 

9.56 

20%     ' 

8oo,OOO 

80%    " 

8,2OO,OOO 

10.25 

30%     ' 

1,200,000 

70%   " 

7,800,000 

11.14 

40%     ' 

1,600,000 

60  %   " 

7,4OO,OOO 

12.33 

50%     ' 

2,OOO,OOO 

50%    " 

7,000,000 

14.00 

60%     ' 

2,4OO,OOO 

40%    " 

6,600,000 

16.50 

10%     ' 

2,8oo,OOO 

30^    "   • 

6,200,000 

20.67 

80%   ' 

3,200,000 

20#     " 

5,800,000 

29.00 

90'%   < 

3,600,000 

10%     " 

5,400,000 

54-00 

(c)     The  proportion  of  the  cost  paid  for 
by  the  sale   of   bonds    at   par   has  been 


27 

extended  in  the  above  tables  to  90  per 
cent,  of  the  total  cost  of  property,  while 
naturally  such  proportion  of  value  could 
not  command  a  bond  at  4  per  cent. 

7.  Capitalization  of  "fair  return"  during 
the  years  in  which  no  return  was  made  to 
the  security  holders. 

On  this  point  the  Railroad  Commission  of 
Wisconsin  has  spoken  wisely  and  clearly. 

In  Hill  vs.  Antigo  Water  Company,  decided 
on  August  3,  1909,  that  body  said : 

"  But  new  plants  are  seldom  paying  at 
the  start.  Several  years  are  usually  required 
before  they  obtain  a  sufficient  amount  of 
business  or  earnings  to  cover  operating  ex- 
penses, including  depreciation  and  a  reason- 
able rate  of  interest  upon  the  investment. 
The  amount  by  which  the  earnings  fail  to 
meet  these  requirements  may  thus  be  re- 
garded as  deficits  from  the  operation.  These 
deficits  constitute  the  cost  of  building  up 
the  business  of  the  plant.  They  are  as 
much  a  part  of  the  cost  of  building  up  the 
business  as  loss  of  interest  during  the  con- 
struction of  the  plant  is  a  part  of  the  cost  of 
its  construction.  They  are  taken  into  account 
by  those  who  enter  upon  such  undertakings, 
and  if  they  cannot  be  recovered  in  some 
way  the  plant  fails  by  that  much  to  yield 
reasonable  returns  upon  the  amount  that 
has  been  expended  upon  it  and  its  business. 


28 

Such  deficits  may  be  recovered  either  by 
being  regarded  as  a  part  of  the  investment 
and  included  in  the  capital  upon  which  in- 
terest is  allowed,  or  they  ma}'  be  carried 
until  they  can  be  written  off  when  the  earn- 
ings have  so  grown  as  to  leave  a  surplus 
above  a  reasonable  return  on  the  investment 
that  is  large  enough  to  permit  it.  When 
capitalized  they  become  a  permanent  charge 
on  the  consumers.  When  charged  off  from 
the  surplus  they  are  gradually  extinguished. 
(These  facts  alone,  however,  do  not  always 
furnish  the  best  or  most  equitable  basis  for 
the  disposal  of  such  deficits.)  Whether 
they  should  go  into  the  capital  account, 
or  whether  they  should  be  written  off,  as 
indicated,  are  questions  that  largely  depend 
onthe  circumstances  in  each  particular  case." 

Some  issues  of  preferred  stocks  are  made 
" cumulative"  as  to  dividends;  i.  e.,  any  failure 
to  pay  the  full  rate  of  dividend  on  the  cumulative 
preferred  stocks  must  be  cared  for  before  any 
payments  of  dividends  can  be  made  to  the  holders 
of  the  common  stocks. 

(d)  BETTERMENTS,  ADDITIONS  AND  EXTENSIONS 
ORIGINALLY  CHARGED  TO  INCOME,  BUT 
WHICH  MIGHT  HAVE  BEEN  CHARGED  TO 
CAPITAL,  CAN  PROPERLY  BE  CAPITALIZED. 

Had  the  actual  income  so  used  been  paid  to 
the  stockholders  as  dividends,  no  question  could 
have  been  raised.  If  so  paid  and  any  or  all  of 


29 

it  subsequently  reinvested,  no  one  would  question 
the  right  to  receive  capital  stock  for  the  addi- 
tional investment.  See,  also,  answer  to  (c). 

There  can  be  no  good  reason  for  prohibiting 
the  direct  accomplishment  of  that  which  by  indi- 
rect means  can  be  done  without  wrong  or  injury 
to  anyone. 

(e)  THE  MODE  OF  VALUATION  OF  PHYSICAL  AND 
NON-PHYSICAL  PROPERTIES  OF  RAILROADS 
IF  VALUE  IS  MADE  THE  BASIS  OF  CAPITAL- 
IZATION. 

It  is  probable  that  not  many  have  been 
misled  by  the  inappropriate  and  inaccurate 
use  of  the  word  "  value"  in  the  application  of  the 
term  "  physical  valuation "  by  those  who  advo- 
cate a  national  investigation  of  the  replacement 
cost  (or  inventory  of  physical  property)  of  Amer- 
ican railways.  As  " value"  is  a  relation  in 
exchange,  that  is  in  commerce,  there  is  no  value 
that  is  not  commercial  and  it  is  both  idle  and  con- 
fusing to  call "  physical  value"  that  which  is  plainly 
and  by  avowed  intendment  different  from  com- 
mercial value.  As  all  economic  value  is  value  in 
use,  and  as  use  is  in  no  way  controlled  by  orig- 
inal cost  or  replacement  cost,  there  can  be  no 
fixed  or  even  continuing  or  constant  relation  be- 
tween either  cost  and  the  real  value.  The  writer 
must  also  assume  that  if  it  is  ever  held  that  cap- 
italization must  be  adjusted  to  "  value  ",  the  latter 


30 

term  is  used  in  its  proper  and  only  true  sense  when 
indicating  value  in  use.  Hence  when  it  is  pro- 
posed to  ascertain  replacement  cost  and  also 
value  in  use,  and  in  connection  with  control  of 
capital  issues,  it  must  be  intended  to  ascertain  each 
separately  and  independently,  and  having  com- 
pared the  aggregate  to  correct  the  former  by  apply- 
ing whatever  proportionate  or  other  allowance  for 
non-physical  value  may  be  found  necessary  to 
make  it  agree  precisely  with  the  latter.  -To  this 
manifest  absurdity  is  the  proposal  for  a  so-called 
"  physical  valuation"  reduced  by  a  rigid  scrutiny 
of  its  proposed  methods  and  uses. 

The  obvious  suggestion  flowing  from  this  con- 
clusion is  that  as  only  value  in  use  is  wanted,  as 
that  is  the  only  real  value,  and  as  it  must  be 
separately  ascertained  in  any  event,  no  other 
and  pseudo  value  need  be  taken.  The  essen- 
tial character  of  the  proposed  method  is  as 
has  been  described  even  when  it  is  applied 
through  determination  of  the  annual  value  of 
the  use  and  the  assignment  of  one  portion  of 
such  annual  value  to  return  on  the  capital 
value  of  the  physical  property  and  another  portion 
to  return  on  the  capital  value  of  non-physical 
property.  The  real  nature  of  the  method  is  not 
even,  effectually  concealed  by  the  capitalization 
of  the  income  assigned  to  physical  property  at  one 
rate  and  of  the  income  assigned  to  non-physical 


property  at  a  different  and  higher  rate.  In  fact, 
if  it  is  necessary  to  conclude  that  a  portion  of  the 
net  annual  income  of  railway  property  is  normally 
paid  to  or  in  respect  of  a  portion  of  capital  entitled 
to  a  lower  rate  of  return  and  the  balance  to  or  in 
respect  of  a  remainder  of  capital  entitled  to  a 
higher  rate,  the  appraisal  of  the  physical  prop- 
erty is  an  excessively  costly,  cumbersome  and 
inaccurate  expedient  for  determining  the  capital 
value  of  either  sort  of  property.  Yet  that  is 
exactly  what  was  done  in  Michigan  by  Professor 
Adams,  Statistician  to  the  Interstate  Commerce 
Commission,  the  "valuation"  he  then  made 
having  been  completed  before  he  altered  his  view 
by  deciding  that  the  non-physical  elements  of 
value  are  entitled  to  no  consideration  whatever, 
and  that  only  cost  of  replacement  is  worthy  of 
inclusion  in  an  official  u  valuation." 

But  is  there  any  real  distinction  between  the 
"  physical  properties  "  and  the  "  non-physical  ele- 
ments "  such  as  seems  to  be  assumed  by  some? 
Is  not  the  superficial  appearance  of  such  a  dis- 
tinction plausible  but  deceptive  ?  A  locomotive 
is  an  entity,  so  is  a  railway.  The  separate  parts 
of  a  locomotive  are  most  of  them  independently 
valuable,  so  are  the  separate  parts  of  a  railway. 
But  a  large  share  of  the  value  of  the  locomotive 
is  the  result  of  the  nice  adjustment  of  these 
separate  parts  to  each  other  and  to  the  work  to 


32 

be  done.  Take  a  hundred  different  sized  loco- 
motives, each  adapted  to  different  services  under 
different  conditions,  and  separate  each  piece  of 
metal,  it  might  be  possible  to  value  all  of  these 
parts,  but  plainly  the  aggregate  would  be  far  less 
than  the  value  of  the  locomotives  from  which  they 
were  taken.  Again,  it  would  be  possible  to  con- 
struct from  these  parts  a  hundred  locomotives 
of  such  poor  design,  their  respective  parts  so  out 
of  adjustment  and  balance  that  they  would  be 
worth  even  less  than  the  parts  out  of  which  they 
were  assembled.  The  highest  paid  intelligence 
has  not  yet  contrived  the  perfectly  balanced  loco- 
motive, but  a  large  part  of  the  so-called  "  physi- 
cal value "  of  every  locomotive  represents  this 
sort  of  highly  paid  intelligence  put  forth  at  every 
stage  from  the  opening  of  the  mines  where  the 
ore  was  obtained  to  the  delivery  of  the  completed 
locomotive.  Take  ten  railways  of  a  thousand 
miles  each,  every  one  of  them  efficiently  con- 
structed and  equipped  with  proper  terminals, 
stations,  signals,  rolling  stock,  and  trained  em- 
ployees, and  property  adapted  to  the  requirements 
of  its  territory  and  traffic ;  separate  them  into 
piles  of  ties  and  rails,  groups  of  locomotives  and 
cars,  acres  of  land,  unorganized  bodies  of  men  of 
varied  capacity  and  training ;  what  sort  of  intel- 
ligence will  it  require  to  build  up,  out  of  these 
masses,  ten  railways  as  efficient  and  useful  as 


33 

those  that  originally  existed  ?  Why  then  should 
the  "physical  value"  of  the  locomotive  include 
the  assembling  of  its  parts  in  proper  balance,  and 
the  "  physical  value"  of  the  railway  exclude  the 
cost  of  the  much  more  complicated  adjustment  of 
its  elements  of  organization,  machinery  and  labor 
and  location  to  each  other  ? 

That  which  has  been  misnamed  "physical 
valuation  "  is  nothing  more  nor  less  than  the  de- 
termination of  the  "cost  of  material  in  place, 
using  materials  of  design,  construction  and  con- 
dition exactly  similar  to  those  at  present  in  the 
property  ". 

The  writer  has  shown  above  that  there  neither 
is  nor  can  be  any  fixed  relation  between  any  two 
of  the  three  items : 

(1)  The  cost  of  material  in  place  (whether 

for  new  or  second-hand  material), 

(2)  The  par  value  of  securities  issued  and 

outstanding,  and 

(3)  The  present  fair  value  of  the  property. 

None  of  the  advocates  of  a  "physical  valua- 
tion " — defined  by  some  as  "the  cost  of  material 
in  place,  less  depreciation",— have  suggested 
any  reasonable  plan  whereby  such  amount  when 
determined  can  be  used  in  arriving  at  the  "fair 
value"  of  the  property.  Unless  such  use  can  be 


34 

made  there  would  appear  to  be  no  justification 
for  the  large  expenditure  involved  in  taking 
such  inventory. 

Physical  property  has  no  value  which  is  not  an 
expression  of  its  adaptation  to  economic  needs. 
This  is  only  another  way  of  expressing  the  inev- 
itable economic  law,  from  which  there  is  no 
escape,  either  in  theory  or  in  practice,  that  has 
been  stated  and  sanctioned  by  the  Supreme 
Court  of  the  United  States,  as  follows : 

"But  the  value  of  the  property  results  from  the  use  to 
which  it  is  put  and  varies  with  the  profitableness  of  that  use, 
present  and  prospective,  actual  and  anticipated.  There  is 
no  pecuniary  value  outside  of  that  which  results  from  such 
use".  C.  C.  C.  &  St.  L.  Ry.  vs.  Backus,  164  U.  5.,  445. 

It  is  not  in  the  original  cost  of  a  railway,  nor 
in  the  condition  in  which  maintained,  but  in  the 
extent  to  which  it  serves  to  effectuate  the  ex- 
changes of  the  surplus  products  of  individuals, 
communities  and  nations  that  a  railway  has  value. 
The  value  of  a  railway  lies,  then,  not  in  its 
physical  property,  but  in  the  use  made,  or  that 
can  be  made,  of  that  property.  The  things  that 
secure  a  broad,  extensive  and  profitable  use  are, 
therefore,  the  things  which  give  value  to  a 
railway. 

Some  of  the  states  have  undertaken  the  de- 
termination of  the  "  cost  of  material  in  place." 
None  has  perfected  a  plan  for  determining  the 
u  fair  value  "  of  the  property.  The  suggestions 


35 

of  the  writer  as  to  some  additional*  items  to  be 
given  consideration  in  connection  with  the  "  cost 
of  material  in  place  "  as  well  as  his  views  as  to 
some  of  the  items  entering  into  the  u  fair  value  " 
of  the  property  are  set  forth  in  a  paper  prepared 
by  him  for  discussion  by  the  Joint  Session  of 
American  Economic  Association  and  American 
Political  Science  Association  at  the  Chamber  of 
Commerce,  New  York,  December  30,  1909,  a  copy 
of  which  is  enclosed  herewith. 

To  the  items  there  enumerated  there  should  be 
added  the  value  of  leasehold  rights,  the  control 
of  traffic  originating  on  other  lines  either  through 
contract  with  such  lines  or  through  ownership  of 
a  controlling  interest  in  the  stock. 

One  of  the  most  important  items  to  be  con- 
sidered is  the  "  Cost  of  Progress  "  which  is  some- 
times referred  to  as  "  abandoned  property,"  or  as 
"  obsolescence."  For  illustration,  in  the  reduction 
of  the  grade  and  revision  of  the  line  of  a  road 
whereby  the  capacity  of  existing  track  is  doubled, 
the  present  instructions  of  the  Interstate  Com- 
merce Commission  require  the  charge  to  operating 
expenses  of  the  cost  of  that  portion  of  the  old  line 
no  longer  continued  in  use.  If,  however,  the 
doubling  of  the  capacity  of  the  line  be  secured  by 
the  construction  of  a  second  main  track,  the 
entire  cost  of  the  new  work  can  be  charged  to 
capital  account  and  paid  for  from  the  proceeds  of 


36 

the  sale  of  capital  securities.  The  latter  method 
becomes  the  easier  to  finance,  but  what  of  the 
comparative  results?  Say,  for  example,  the  orig- 
inal cost  of  material  of  existing  property,  includ- 
ing equipment,  stations,  yards,  etc.,  was  $10,- 
000,000,  that  the  first  main  track  cost  $1,000,000 
and  that  to  double  the  capacity  of  the  main  track 
would  require  a  present  expenditure  of  $i  ,000,000, 
either  for  (i)  a  reduction  of  the  grades  and 
curves  of  the  first  main  track  or  (2)  for  the  con- 
struction of  a  second  main  track.  The  increase 
in  capacity  is  identical,  but  in  the  first  case  the 
cost  of  train  service  to  handle  the  tonnage  is  de- 
creased 50  per  cent,  and  some  reduction  in  main- 
tenance is  secured,  while  in  the  second  case  no 
economies  of  operation  are  effected,  but  the  ex- 
penses may  be  increased.  Undoubtedly,  road  (i) 
would  be  much  more  valuable  than  road  (2),  yet 
the  Commission  says  a  portion  of  the  cost  of  per- 
fecting the  road  (i)  must  be  charged  to  operating 
expenses,  and  cannot  be  capitalized.  What  gen- 
eral manager  will  dare  recommend  such  exten- 
sive improvements  when  the  charging  of  a  por- 
tion of  the  cost  to  operating  expenses  will  show 
the  dividend  as  unearned  for  a  single  year,  and 
thus  render  the  securities  of  the  company  no 
longer  legal  investments  for  savings  banks, 
trustees  of  trust  funds,  etc.  ?  As  an  alternative, 
he  might  permit  the  old  line  to  remain  and,  by 


37 

placing  thereon  a  few  cars  occasionally,  could 
consider  it  still  in  use  and  carry  it  in  his  capital 
account,  thus  avoiding  the  charge  to  operating 
expenses.  Thus,  again,  it  is  the  method  and 
not  the  result  that  is  controlled  by  these  in- 
structions. What  should  be  done  is  to  permit 
the  cost  to  be  charged  against  the  surplus  accu- 
mulated during  the  years  in  which  was  used 
the  property  to  be  abandoned.  This  would  not 
adversely  affect  the  operating  income  of  the  year, 
and  would  not  impair  the  credit  of  the  company. 
Plainly,  the  instructions  of  the  Commission 
tend  to  compel  a  method  that  produces  results 
contrary  to  the  economic  law. 

SECOND. 

THERE  COULD  BE  NO  USEFULNESS  COM- 
MENSURATE WITH  ITS  COST  IN  AN  OFFICIAL 
DETERMINATION  OF  REPLACEMENT  COST. 

The  writer  has  no  concern,  other  than  as  a 
tax-payer  and  as  the  officer  of  a  tax-paying  cor- 
poration, in  the  question  whether  the  Federal 
Government  should  undertake  an  official  valua- 
tion of  railway  property.  Fairly  undertaken, 
and  under  competent  and  unbiased  auspices,  such 
a  valuation  could  in  no  way  impair  any  proper 
railway  interest.  In  view,  however,  of  what  has 
already  been  said  herein,  it  is  unnecessary  fur- 
ther to  present  reasons  for  his  opinions  that  such 
an  undertaking  could  benefit  no  one,  and  would 


38 

entail  an  unnecessary  and  large  expense  which 
the  tax-paying  public  ought  not  to  be  compelled 
to  bear.  The  only  reasonable  suggestion  sus- 
taining the  utility  of  such  a  valuation  in 
connection  with  rate-control  is  based  upon  the 
possibility  that  the  Courts  may  find  it  necessary, 
in  order  to  support  proper  standards  by  which 
the  reasonableness  of  rates  may  be  tested,  to 
revert  to  the  early  legal  doctrine  that  such  rates 
are  separable  into  parts  representing  (a)  tolls  for 
the  use  of  the  property  or  highway  and  (6)  com- 
pensation for  the  performance  of  a  service  on 
such  highway.  This  suggestion  seems  to  merit 
thoughtful  consideration. 

The  United  States  Supreme  Court  has  decided 
that  where  Congress  has  granted  lands  to  aid  in 
the  construction  of  a  railroad,  with  the  provision 
that  "said  railroad  shall  be  and  remain  a  public 
highway  for  the  use  of  the  Government  of  the 
United  States,  free  from  all  toll  or  other  charge, 
for  the  transportation  of  any  property  or  troops 
of  the  United  States,  such  provision  secured  to 
the  Government  merely  the  free  use  of  the  rail- 
road, and  did  not  entitle  the  Government  to  have 
troops  or  property  transported  over  the  railroad 
by  the  Railroad  Company  itself  free  of  charge 
for  such  transportation."  (Lake  Superior  & 
Mississippi  Rway.  Co.  v.  United  States,  93  U.  S. 
442). 


39 

"  In  the  case  of  Boyle  v.  Philadelphia  and 
Reading  Railroad  Company,  54  Penn.  310, 
decided  in  1867,  the  Supreme  Court  of 
Pennsylvania  held  that  the  charter  of  the 
latter  company  made  the  road  a  public  high- 
way, on  which  all  persons  might  place 
vehicles  of  transportation  on  conforming  to 
the  regulations  of  the  company ;  and  that  in 
limiting  the  amount  of  'tolls'  demandable 
for  transportation  on  the  road,  the  legislature 
had  reference  to  'tolls'  charged  to  other 
parties  using  the  road,  and  not  to  the  freights 
or  charges  for  transportation  which  the  com- 
pany itself  was  authorized  to  demand  when 
performing  transportation."  Lake  Superior 
&  Mississippi  Rway.  Co.  v.  United  States, 
93  U.  S.  448. 

In  other  words,  the  owner  of  the  turnpike  is 
entitled  to  not  less  than  the  legal  interest  upon 
the  value  thereof;  and  at  the  same  time,  the 
hackman  taking  passengers  over  the  turnpike  is 
entitled  to  a  reasonable  reward  for  the  services 
rendered  by  him,  and  this  reward  will  depend 
upon  efficiency,  and  that  return  is  never  limited  to 
the  amount  of  his  expenses  plus  a  fair  daily  wage. 

Does  the  situation  change  if  one  person  both 
owns  the  turnpike  and  operates  cabs  over  it?  It 
does  not,  and  there  is  no  reason  why  it  should. 

The  larger  hotels  are  owned  by  individ- 
uals or  private  corporations,  and  are  leased  to 
the  parties  by  whom  they  are  operated.  The 


4o 

owners  receive  rent  in  payment  of  use  of  the 
property,  while  the  manager  receives  pay  for  the 
service  rendered. 

Another  example  is  the  canals.  There  are 
some  owned  by  individuals  or  private  corpora- 
tions who  maintain  the  canal,  charging  others 
for  the  use  of  the  canal.  Other  people  own  the 
boats  and  perform  the  service,  receiving  a  reward 
for  service  rendered.  This  same  practice  existed 
on  the  railroad  lines  of  The  Delaware  and  Hud- 
son Company  when  it  was  first  built,  the  company 
maintaining  the  railroad,  making  a  charge  for 
the  use  of  same  and  permitting  others  to  operate 
over  the  railroad,  which  parties  received  a  profit 
from  their  transaction  to  cover  the  service  ren- 
dered by  them. 

In  like  manner  the  carriers  are  entitled  to  a 
return  upon  the  value  of  the  railroads  to  cover 
the  use  thereof,  and  this  rate  of  return  will 
increase  with  the  risk  incurred ;  and  they  are 
also  entitled  to  a  reward  for  the  service  rendered, 
and  this  reward  must  increase  with  improved 
service  or  with  increased  service.  They  are 
entitled  to  earn  for  such  service  the  ordinary 
return  of  industrial  corporations. 

The  following  statement  shows  the  book  cost 
of,  and  the  return  upon,  that  portion  of  the  fixed 
property  of  the  carriers  which  is  devoted  to  public 
use: 


.2 

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rA    "^       ^ 


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$t>  £ 


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Tj-VO    lOtOlOTtO    COO    COM    cOt^lO  O'OO" 

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o  oo  t-  o  co  TJ-  loao  vo  «o  TJ- M  M  co  o  koo  oo  oo  r~- 

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M    I 

to 


M  OM^  ON  ONVO  1000  o  covo  -000-^1- 

-  -  - 


•  O  O  Tj*vo  IOCN  t^M  »-(  CN  t^CNvo  r^CN  r>.t^too 

:  ooo  o  ioiot^.ooovo  M  CNVO  TJ-OO  o  ON  t>.  to  CN 

;  Tj;O_t^.O  OOO  COO  r--CN  cOTj-Tj-ONf^M  ONONO 

;  o"  M"  TJ-OO"  «'vo"  Tt vo"  o"  r^  M'  T? vo'  o'  10  co  o'  CN  M" 

:  10  ONVO  ON  t^  M  TJ-  i^oc  10— oN-o-Tj-cocNO 

:  M    «    cO  t^  •->  00    M    COVO    O    CN   Tj-TJ-tOCN    O    COTJ-Tj- 

i  ONOO~OO~  o"oo'  10  T? \o"  ON  CN"  CN"  o"vo"  t-^  o"vo"vo*  iovo" 

:  vo   M    M   **  10  1^00  00    O    fN   co^-vo    5   CN    CO  ON  O 

t  Tj-ioiOiOiO^OiOiO  lOvO  vO  VO  VO  vO   t^  r^.  l^.  t-^00 


'.  M  o  r^  O  M  10  IO  COOO  vo  IO  l^-vo  O>  ON  O  IO  Tt-  cs 
;  COvO  (N  CO  iO  CO  t^OO  OO  lOOO  CO  <N  O  O\  "OOC  OO  O 
•  COVO  r^  ON  CS  IO  t^vO  vOOOI^OTj--«  ONMOO  O 


«t^tOM 


•  io  C?  O 


ON  to  ON  covo  coONCNOO  Tj-OOO  CO"  O  O  ior^O 
M  O  tO  M  COVO  VO  t^CN  COt^O  t^CVl  t^O  OlOTj- 
00  00  vo  O  M  CN  iO  r^oO  O  coiOI^MVO  MVO  CN^- 

t^oo'oo"  ON  ON  ON  ON  ON  ON  o"  o"  o"  o"  M"  M"  CN"  CN"  co  to 


_r  o  to  t^  o  ONVO  CN  IOTJ-M  IOCN  ovooo  M  r^vo  CN 

3  lOONONC^"   M   TJ-  iovo   1003   >0  Co  O  vo    O   TJ- Iovo 

g  ON  Tj-00_  -I~-.ONO^TJ-CN    O    COONO    CNO    O    COIOTJ- 

3  10  - ^vo"  10  to  to  T?  10  —  vo"  10  lovo'oo'vo"  — "oo"  Tf  o" 


tl 


l 


^jCH 

flu- 

cb° 


T1    IO  Tj-  ON  M    CO  Tf-VO    IO  f^vO    CN    tOOO    CN    cOvO    M    o    CO 

C  ONCOO  CN^IOONONO  coioooooo  r>.*o  «  10  co  « 

O  o"  ONOO"  T?  T?  o"  ONVO"  t-^  rC  M'  o"  to  t^  tC  o"  iO  ON  M' 
O  OSTJT--'O~  t^CN^-Th  iovo  Co  CN  vo  00   ONVO   O  r^- 

cywvoooooMOTfON  cooo  fo  10  -  t>.  o  oo  fox  to 


L°°.  °.  °^  "2 

Tf  to  CN"  T^  M  o"  ONVO"  to 
TJ-OO  CN  co  r^  r^*  *N  CN  T*- 


MQOOO 
co  uO  r~- 
00  ON  M 


lOM 


J^  co  tooo"  1000"  M"  ON  ON  T?  ri  TTOO"  M"  to  T?  0*00"  M~  uS 
"  toovi^M  cotocN  r^toM  r^o  CN  r^oo  t^oo  r^.  to 

O    CO  CN    O   TJ-  IOVO    ON  M    cs    Tj-vO  OOOCNI^MlOOO 
^  ^OO"  00*  oo'oo"  Oo'oo"  ON  ON  O^>  ON  ON  O"  o"  o"  M"  M"  <s"  cs" 


IS 

03    O 

II 

1§ 
if 


42 

As  the  return  for  use  of  property  is  less  than  the 
minimum  legal  rate  of  interest,  it  can  be  said  that 
there  has  been  no  reward  for  the  service  rendered. 

While  some  few  individual  rates  may  need 
changing,  these  particular  rates  should  be  propor- 
tioned to  other  rates  at  present  in  effect  on  other 
traffic.  Generally  speaking,  however,  there  can- 
not be  sustained  any  charge  of  unreasonableness 
in  the  general  rate  schedules  unless  and  until  a 
reward  for  service  is  made  to  the  carrier.  As 
this  has  not  been  done,  it  seems  unnecessary  to 
now  incur  a  large  expenditure  for  a  valuation, 
when  the  "value"  is  constantly  changing,  and 
when  many  years  must  necessarily  elapse  be- 
fore the  earnings  of  the  railroads  will  not  only 
earn  the  six  per  cent,  to  cover  "use"  of  property 
but  in  addition  thereto  will  earn  a  reasonable 
reward  for  "service  rendered". 

THIRD. 

THE  ADVISABILITY  OF  FEDERAL  REGU- 
LATION OF  RAILROAD  SECURITIES ;  THE  EX- 
TENT AND  METHOD  OF  SUCH  REGULATION 
IF  IT  IS  DEEMED  ADVISABLE  ;  THE  ADVISA- 
BILITY OF  FEDERAL  REGULATION  FIRST,  IF 
IT  EXCLUDES  SIMILAR  STATE  REGULATION, 
OR,  SECOND,  IF  IT  IS  FOUND  NOT  TO  EX- 
CLUDE SUCH  STATE  REGULATION;  AND  THE 
LEGALITY  OF  SUCH  REGULATION. 

Those  who  favor  statutory  restrictions  and 
official  control  of  the  security  issues  of  railways 


43 

have  suggested  but  two  objects  to  be  attained 
thereby,  namely,  (a)  the  protection  of  railway 
patrons  against  excessive  charges  and  inferior 
service,  and  (b)  the  protection  of  investors  against 
fraud.  These  are  both  legitimate  purposes,  wor- 
thy of  the  efforts  of  the  best  government  and  the 
most  accomplished  statesmen,  but  as  to  either  it 
is  proper  to  inquire  (first)  whether  the  desired  end 
can  be  obtained  or  promoted  by  the  means  pro- 
posed, (second)  whether  a  better  means  is  avail- 
able, and  (third)  whether  the  evils  to  be  cured 
would  not  be  exceeded  by  new  evils  brought 
about  by  the  application  of  the  proposed  remedy. 
These  inquiries  are  suggested,  their  propriety  is 
self-evident. 

CAPITALIZATION    HAS     NO     DIRECT     INFLUENCE 
UPON    RAILWAY    CHARGES   OR   SERVICE. 

The  suggestion  that  a  superabundant  issue  of 
capital  securities  would  lead  to  higher  charges  for 
railway  services  might  seem  to  be  of  more  practical 
importance  if  there  were  any  real  and  general 
over-capitalization  of  American  railway  property. 
But,  as  has  been  proven  over  and  over  again,  the 
contrary  is  the  fact — on  the  whole  the  value  of  the 
railway  system  of  the  country  is  actually  and 
greatly  in  excess  of  the  par  value  of  all  the 
securities  outstanding.  Examining  the  sugges- 
tion as  it  stands,  however,  it  plainly  involves  the 


44 

assertion  that  charges  can  be  advanced  at  will  and 
that  the  desire  to  earn  a  return  upon  all  out- 
standing securities  is  a  sufficient  incentive  to  such 
advances.  But  between  the  desire  for  more 
revenue  and  its  satisfaction  by  means  of  advanc- 
ing rates  to  unreasonable  figures  or  the  substitu- 
tion of  inferior  service  stands,  (first)  the  regula- 
tive power  and  established  agencies  of  the  federal 
and  state  governments,  and  (second)  the  fact  that 
the  commodities  moved  must  be  sold  in  competi- 
tive markets  where  they  meet  the  same  and 
substitutable  articles  produced  locally  and  brought 
from  other  sources  of  supply,  and  that,  in  conse- 
quence, exorbitant  rates  or  inferior  service  will 
invariably  produce  less  and  not  more  net  income. 
Supplying  warehouse  and  elevator  facilities 
is  an  industry  affected  with  a  " public  interest", 
in  the  legal  sense,  of  precisely  the  same  character 
as  that  attaching  to  railway  property  and  public 
regulation  of  warehouse  and  elevator  charges 
rests  upon  precisely  the  same  legal  and  economic 
foundation  as  public  control  of  railway  rates 
or  services.  Has  it  ever  been  suggested  that 
by  putting  an  additional  mortgage  upon  an  ele- 
vator property  the  proprietors  could  place  them- 
selves in  a  position  to  obtain  higher  rates  for 
their  services?  On  the  contrary,  it  is  well  known 
that  the  necessity  of  earning  interest  or  passing 
into  bankruptcy,  to  say  nothing  of  a  desire  to 


45 

earn  dividends,  tends  to  stimulate  competition 
with  the  normal  result  of  tending  strongly  to 
reductions  in  rates  unduly  high  as  a  means  of 
obtaining  more  business  and  more  revenue. 
Rates  properly  adjusted  to  the  commercial  re- 
quirements of  the  persons,  communities  and  in- 
dustries served  by  a  railway  and  accompanied  by 
proper  economies  of  management  determine  value 
in  use,  they  cannot  be  the  consequence  of  meth- 
ods of  financing  in  any  direct  manner  or  to  any 
tangible  degree. 

On  the  other  hand,  if  improper  statutory  re- 
strictions should  be  so  laid  upon  the  issue  of 
railway  securities  as  to  retard  the  inflow  of 
capital  necessary  to  defray  the  cost  of  improve- 
ments tending  toward  lower  operating  cost  or 
to  provide  for  extensions  demanded  by  the 
growth  of  industry,  these  restrictions  would 
tend  inevitably  to  raise  the  rate  of  return  de- 
manded by  capital  and  to  postpone  economies. 
Both  of  these  undesirable  results  would  un- 
doubtedly follow  from  such  unwise  legislation. 
And,  as  it  is  an  invariable  law  of  the  railway 
industry  that  the  larger  share  of  any  economy 
in  operation  accrues  to  the  railway  patrons  in 
the  form  of  reduced  charges  for  services,  the 
indirect  consequence  of  injurious  restrictions 
would  be  higher  rates  than  those  which  would 
otherwise  be  charged. 


46 

Public  utterances  of  federal  and  state  officers, 
as  well  as  articles  in  the  daily  press  and  in 
monthly  and  other  periodicals,  would  indicate 
that  there  is  a  widespread  opinion  to  the  effect 
that  the  securities  of  railways  have  been  watered 
and  that  this  condition  is  general.  There  is, 
therefore,  shown  below  an  analysis  of  the  con- 
solidated balance  sheet  of  all  the  railroads  of  the 
United  States  as  shown  in  the  report  of  the  Com- 
mission for  1908  and  1890: 


I* 

W) 

i 
i 


2 


f- 

•3 

1 


c/3 

1 

5 

1 

•3 


3>~ 


sti 

M    U 


li?  = 


££•£! 


OO  VO 


COCO 


1010 


££ 


§1 

?^ 


a 


PI 


oo 


ftft 


!o?*T 


O\>O 


•1 


i« 


S.S 


I 

- 
1 


If 

=  a 


^•o 
w  a 

35 
•N 

fl  fc  3 

0   3   «5 
DOC 


^ 

III 

«.«B 


as   --g-o-   gg§     ^      g^     gg^ 

Ifl^  ss|s     Sgl  i  sj,        ^g     i  <^2     s 
2M|lSilM3l!        S5    3  H?33l 

o  o  o  C  H  E  S  w  P  *  rt.5  ,°  ^3  *•"  fcI5  «  ,°    z  a  u,  o  * 

^ii  itrun 

«  M  a  §Ct/2  o  S 


l§ 

"rt^S 

3* 

n 

I! 

f^tn 


48 


The  following  statement  shows  the  length  in 
miles  of  main  and  other  tracks  (See  note)  : 


Track. 

1908. 

1890. 

Increase. 

Per  Cent, 
of 
Increase. 

Single  Track  

213,888.36 

142,665.89 

71  222  47 

4Q  Q 

Second  Track  

20,209.05 

8,437.65 

II.77I.4O 

I7Q    C 

Third  Track  

2,081.16 

760.88 

1,320  28 

17-3  c 

Fourth  Track  

1,408.99 

56r.8r 

847.18 

ISO  8 

Total,  all  main  tracks 
Yard  track  and  sidings 

237,587.56 
73,728.57 

152,426.23 
30,750.17 

85,l6l.33 
42,978.40 

55-9 
139-8 

Total  mileage  oper- 
ated (all  tracks)... 

311.316.13 

183,176.40 

128,139.73 

69.9 

NOTE  :— The  Interstate  Commerce  Commission  in  1908  report  that  their 
Balance  Sheet  covers  "miles  of  road"  aggregating  213,888.36  miles,  whereas 
their  statement  of  mileage  represents  all  roads  reporting  to  the  Commission 
whether  or  not  they  furnished  a  Balance  Sheet. 

To  analyze  the  Consolidated  Balance  Sheet,  we  have  revised  the  state- 
ment of  mileage  to  cover  same  roads  as  are  included  in  the  General  Balance 
Sheet.  The  "miles  of  road,"  /.  <?.,  miles  of  first  main  track  are  actual.  The 
Commission's  report  not  showing  separately  for  each  line  the  miles  of  other 
main  tracks  or  yard  tracks  and  sidings,  the  figures  shown  in  the  statement 
of  mileage  are  approximate.  It  includes  mileage  of  all  second,  third  and 
fourth  tracks.  Undoubtedly  practically  all  of  the  second  tracks,  third  tracks 
and  fourth  tracks  are  owned,  or  operated,  by  roads  furnishing  the  Com- 
mission with  a  Balance  Sheet.  Mileage  of  Yard  Tracks  and  Sidings  is  based 
on  the  proportion  which  the  single  track  mileage  of  roads  represented  in  the 
Balance  Sheet  bear  to  the  total  single  track  mileage  of  roads  reporting  to  the 
Commission. 

The  Commission,  in  its  annual  report,  shows 
the  securities  issued  per  mile  of  road  (first  main 
track)  but  does  not  show  the  results  per  mile  of 
main  track,  (t.  e.,  ist  main  track,  2nd,  3rd,  4th 
and  other  main  tracks),  nor  does  it  show  the 
results  per  mile  of  all  tracks,  (z.  e.,  main  tracks, 
yard  tracks,  passing  tracks  and  industrial  tracks). 
From  the  Consolidated  Balance  Sheet  it  will  be 
noted  that  the  securities  per  mile  of  road  have 
increased  29  per  cent.,  while  per  mile  of  main 
track  they  have  increased  only  24  per  cent,  and 


49 

per  mile  of  all  tracks  they  have  increased  but  14 
per  cent.  However,  deducting  the  investments 
in  stocks  and  bonds  of  other  corporations  and 
showing  the  results  only  for  the  securities  issued 
account  of  the  cost  of  road  and  equipment,  we 
have  an  average  per  mile  of  road  of  $62,388,  an 
increase  of  12  per  cent.  ;  and  an  average  per 
mile  of  all  main  tracks  of  $56,166,  an  increase  of 
8  per  cent. ;  and  an  average  per  mile  of  all  tracks 
of  $42,864,  or  a  decrease  of  iV  of  i  per  cent. 
It  will  be  noted  that  a  considerable  part  of  these 
increases  is  due  to  increased  cost  of  equipment 
and  the  advantageous  results  obtained  from  that 
investment  are  clearly  shown  below.  Of  the 
investment  in  the  track  itself  (cost  of  road)  it 
will  be  noted  that  the  cost  per  mile  of  main 
track  has  increased  only  5  per  cent,  while  the 
cost  per  mile  of  all  tracks  shows  a  slight  decrease 
in  1908  as  compared  with  1890. 

Moreover,  the  result  is  surprising  when  con- 
sidering the  large  expenditures  since  1890  for 
reduction  of  grades,  revision  of  line,  interlocking 
towers,  automatic  block  signals,  increased  weight 
of  rail,  increased  capacity  of  bridges,  improved 
stations  and  terminals,  elevation  of  tracks  and 
the  many  other  items  classified  as  Additions  and 
Betterments  and  increasing  the  aggregate  cost  of 
material  in  place.  A  very  considerable  portion 
of  these  improvements  has  been  charged  to  Income 


Account  or  to  Profit  and  Loss  Account,  and  is 
not  included  in  the  u  Book  Cost  of  the  Property/' 
and  no  capital  securities  were  issued  on  account 
of  same.  The  charges  to  capital  account  during 
the  past  twenty  years  at  least  can  be  said  to  have 
been  conservative. 

The  following  statement  shows  the  relation  of 
the  Book  Cost  of  Railways  to  the  traffic  handled, 
and  clearly  indicates  the  increasing  efficiency  of 
the  railways  and  the  reduction  in  the  unit  charge 
to  the  public : 


Change, 

Per  Cent. 

1090. 

Increase. 

Decrease. 

(Book)  Cost  of  Railways  and 
Equipment  (including  Ma- 

«7  8iq  177  T.T.I 

71  80 

2l8  ^8l  SS4-  8O2 

18656 

Passenger  Miles  

29.082,836,944 

11,847.785,617 

14547 

— 

Total  Traffic  Units  

247,464.391,746 

88,054,832,915 

181.03 

- 

Capital  Cost  per  Unit  of  Traffic 

5.43  cents. 

8.88  cents 

- 

38.85 

Charge  to  Public  Per  Unit  of 
Traffic  

9.0  mills 

i.  ii  cents 

18.92 

From  the  printed  reports  of  the  Interstate  Com- 
merce Commission  it  will  be  seen  that,  although 
there  has  been  some  increase  in  the  average  re- 
turns to  the  investor,  there  yet  remains  consider- 
able risk  in  connection  with  investments  in 
steam  railways.  Further,  the  increase  in  rates 
of  pay  of  employees  in  1908  over  1892  ranged 
from  5.9  per  cent,  to  37.5  per  cent  (average  in- 
crease 19.1  per  cent.).  The  increases  in  pay 


granted  to  employees  during  the  year  1910  will 
range  from  8  per  cent,  to  10  per  cent,  over  the 
rates  in  effect  in  1908. 

Notwithstanding  an  increase  in  returns  to  the 
investor,  the  very  large  increase  in  the  average 
rates  of  employees  and  an  increase  in  amount  of 
other  items  entering  into  the  cost  of  operation, 
the  shipper  has  paid  to  the  railways  at  least  19.87 
per  cent,  less  per  revenue  ton  mile  than  was  paid 
in  1890.  These  results  have  been  obtained  princi- 
pally in  three  ways  : 

First. — A  reduction  in  the  grades,  the  cost  of 
which  necessarily  added  to  the  average  cost  per 
mile  of  track. 

Second. — Increased  investment  in  equipment: 


1908. 

1890. 

Increase. 

Per  Cent. 

Total  locomotives  

S7,6o8 

30,140 

27,558 

91.4 

Total  passenger  cars  
Total  rev.  freight  cars.... 

45.292 
2,100,784 

26,820 
918,491 

18,472 
1,182,293 

68.9 
128.7 

As  the  miles  of  main  track  increased  only 
49.9  per  cent,  it  will  be  seen  that,  necessarily, 
the  investment  uper  mile  of  track"  on  account 
of  locomotives,  passenger  cars  and  freight  cars 
has  very  materially  increased. 

The  roadbed  has  been  strengthened  by  use  of 
heavier  rail,  and  by  the  substitution  of  iron  and 
steel  for  wooden  bridges,  etc.,  and  terminal  facili- 
ties have  been  enlarged  and  improved. 


52 

Third. — The  aggregate  capacity  of  all  equip- 
ment has  increased  much  greater  than  the 
increase  in  number  of  locomotives  and  cars. 
The  reports  only  show  this  information  for  the 
years  1902  to  1908,  both  inclusive.  The  average 
tractive  power  of  locomotives  in  1908  was  26,356 
pounds,  as  compared  with  20,485  pounds  in  1902, 
being  an  increase  of  5,871  pounds,  or  28.7  per 
cent,  per  locomotive.  The  average  capacity  of 
freight  cars  in  1908  was  35  tons,  as  compared 
with  28  tons  in  1902,  an  increase  of  7  tons,  or  25 
per  cent.  Undoubtedly,  the  average  capacity 
of  locomotives  and  the  average  capacity  of  freight 
cars  in  1908  was  not  less  than  60  per  cent,  above 
the  average  capacity  of  1890. 

The  only  data  for  the  period  prior  to  1902 
appears  to  be  that  included  in  a  report  by  Mr. 
L.  F.  Loree,  as  Reporter  (for  United  States)  to 
the  International  Railway  Congress  held  in  Paris 
in  1900,  who  communicated  with  all  roads  in  the 
United  States  then  operating  500  miles  of  line, 
or  over,  relative  to  the  capacity  of  cars  actually 
in  service.  The  result  is  shown  in  the  following 
statement : 


53 


-fcg 

-   S 


>>  V  ui 

81 


l 


r 


SSI 

op 


PJ    CM       O    P) 

E?  $  pi  ?i 


83 

t<r>. 


447 
447, 


00   S 


SI 


H4- 
255, 


C7SCM 


5,8 

w   ro 


120, 
245, 


00   col  PI   t^. 


OM» 


88 


•fao 


1588 


T3 

a  o 

s'S 


v*l"i  -fa 

?  •  w  •  v  o  o  5 


|g^35g*3 

S        Is  <i  M  d  a  o  %  li 


TJ       M 

?^i? 


I  s 


*j  «;  a 
'O  'H  «  a 
1  «  S  o  h 


54 

As  a  result  of  these  improvements  in  roadway 
and  equipment,  the  average  number  of  tons  of 
freight  handled  per  freight  train  in  1908  was 
351.80  tons  as  compared  with  296.47  tons  in 
1902,  an  increase  of  55.33  tons,  or  18.6  per  cent. 

The  average  tons  per  freight  train  in  1908 
was  351.80  tons  as  compared  with  175.12  in 
1890,  an  increase  of  176.68  tons,  or  100.8  per 
cent. 

If  the  figures  prove  any  one  thing,  it  is  that 
there  has  been  no  general  practice  on  the  part 
of  the  roads  of  the  country,  from  1890  to  date,  of 
issuing  capital  securities  without  securing  full 
value  for  the  vast  amount  referred  to.  They 
certainly  do  not  afford  ground  upon  which  can 
be  based  an  argument  for  government  super- 
vision of  the  issuance  of  securities. 

INVESTORS  SHOULD  BE  PROTECTED  AGAINST 
FRAUD. 

Fraudulent  representations  in  the  issue  or 
sale  of  railway  securities  may  not  only  deprive 
unwary  investors  of  accumulated  savings  but 
they  tend  to  destroy  confidence  in  such  invest- 
ments in  general  and  to  retard  the  normal  devel- 
opment of  the  industry.  Happily  such  misde- 
meanors are  matters  of  history  rather  than  of 
recent  occurrence.  With  the  railroads,  the 
government,  through  its  system  of  accounts,  now 


55 

regulates  the  items  entering  into  the  capitaliza- 
tion of  the  railways,  and  it  ought  not  to  under- 
take to  have  each  of  them  approved  by  a  com- 
mission before  being  capitalized.  But  if  this 
danger  can  be  regarded  as  in  any  way  threat- 
ening it  is  submitted  that  laws  for  the  punish- 
ment of  the  guilty,  not  laws  for  the  repression 
of  innocent  and  guilty  alike,  constitute  the 
indicated  remedy.  No  one  will  object  to  the 
most  drastic  laws  of  this  sort  that  can  be 
contrived  and  all  of  the  properly-minded  will 
favor  their  rigorous  enforcement.  In  other  words, 
the  government  should  " regulate"  and  not 
"control"  the  issues. 

For  illustration  :  By  means  of  statutory  pro- 
visions, the  government  regulates  the  class  of 
securities  that  can  be  purchased  by  insurance 
companies,  savings  banks,  and  trustees  of  trust 
funds.  No  commission  is  appointed  to  specifi- 
cally pass  upon  each  security  purchased,  either 
prior  or  subsequent  to  the  purchase. 

In  a  previous  paragraph,  we  have  shown  the 
control  now  resting  with  the  present  stockholders. 

As  to  the  price  to  be  paid  by  new  investors  in 
the  securities  of  the  Company,  is  a  question  of 
exchange  between  a  buyer  and  a  seller.  Whether 
or  not  the  purchase  be  profitable  to  the  new  buyer, 
will  depend  upon  the  "present  value"  of  the 
property,  and  not  upon  the  aggregate  par  value 


56 

of  securities  outstanding.  We  have  stated  be- 
fore that  the  property  may  be  worth  more  to  one 
person  than  to  another. 

In  this  connection,  suppose  the  present  security 
holders  wish  to  issue  additional  stock  to  other 
parties,  at,  say,  $150  per  share  having  a  par 
value  of  $100,  but  a  supervising  commission 
should  say  the  price  must  be  $125  per  share. 
The  present  stockholders  could  then  subscribe 
pro  rata  for  the  new  stock  at  $125  per  share, 
and  subsequently  sell  it  in  the  market  at  $150 
per  share.  In  other  words,  to  protect  the  in- 
vestor would  involve  more  than  the  price  at 
which  the  Company  issues  the  security;  it  would 
necessitate  supervision  over  private  sales  of  stocks 
and  over  the  security  markets. 

To  the  extent  that  the  new  investor  would  be 
guided  by  the  Commission's  price  on  the  securi- 
ties, the  investor  can  be  protected  by  the  reports 
now  filed  with  the  Commission. 

In  any  event  the  most  serious  risk  accepted  by 
the  purchaser  of  railway  securities,  which  is  but 
another  aspect  of  the  responsibility  which  he 
ought  to  and  must  bear,  that  of  obtaining  or 
failing  to  obtain  properly  efficient  management, 
cannot  adequately  be  covered  by  any  act  of  any 
legislative  body,  National  or  State. 


57 

EXISTING    LAWS    PREVENT    FUTURE   OVER- 
CAPITALIZATION. 

Whatever  capital  securities  are  now  outstand- 
ing on  account -of  any  rail  way  property  represent 
rights  of  legal  or  equitable  ownership  which  are 
protected  by  Constitutional  guarantees  and  could 
not  be  impaired  even  in  the  unthinkable  event 
that  such  impairment  should  be  favored  by  the 
majority  of  any  legislative  body.  Future  issues 
must  be  controlled,  as  has  already  been  indicated 
herein,  by  the  necessities  of  the  public  served  by 
the  carriers  and  of  the  carriers  themselves,  by 
the  conditions  of  investment  markets,  and  by 
the  requirements  of  the  accounting  methods  en- 
forced under  authority  of  law  by  the  Interstate 
Commerce  Commission  and  the  Railroad  Com- 
missions of  the  several  States.  The  Interstate 
Commerce  Commission  now  closely  supervises 
the  accounts  of  all  interstate  railways,  and  they 
require  monthly,  annual  and  periodical  state- 
ments, thus  assuring  the  utmost  publicity. 
Prosecutions  are  likely  to  result  should  any 
illegal  act  be  committed  ;  while  the  attitude  of 
the  investing  public,  when  fully  informed,  will 
make  it  wholly  impossible  to  hereafter  issue 
capital  securities  beyond  those  which  properly 
cover  charges  of  this  character.  It  is  submitted 
that  this  control  or  regulation  of  capitalization  is 
effectual  and  sufficient. 


58 

FEDERAL   CONTROL    PREFERRED   TO  THE  SEP- 
ARATE CONTROL  OF  FORTY-SIX  STATES. 

The  life  and  powers  of  a  corporation  as  limited 
by  its  charter  are  co-extensive  with  the  territorial 
boundaries  of  its  creators  somewhat  increased  by 
the  comity  of  the  States — but  its  range  of  action 
even  under  that  charter  is  limited  by  the  jurisdic- 
tion of  its  creator  over  those  actions. 

The  writer  will  not  attempt  to  discuss  the 
question  whether  in  the  admitted  absence  of  any 
possible  effect  upon  rates  the  Federal  govern- 
ment is  entrusted  with  power,  under  the  Com- 
merce clause  of  the  Constitution  or  otherwise, 
to  legislate  with  reference  to  the  capital  issues 
of  interstate  railways.  However,  should  the 
activities  of  the  government  be  confined  to  a 
''regulation"  and  not  to  a  ''control"  of  the  issue 
of  new  securities,  and  exceptions  to  the  general 
rule  are  permitted  only  when  first  approved  by  a 
Commission  appointed  for  that  purpose,  the  mat- 
ter could  be  handled  with  greater  despatch  and 
more  intelligently  by  the  several  states  than  by 
the  federal  government,  as  the  state  commissions 
would  be  in  a  better  position  to  pass  upon  the 
necessity  of  making  exceptions.  In  this  case,  it 
would  be  especially  important  that  the  statutory 
requirements  of  the  several  states  be  made  uni- 
form and  that  the  carrier  be  required  to  secure 
the  approval  only  of  the  commission  appointed 


59 

by  the  state  granting  the  charter  to  the  carrier 
corporation.  Otherwise,  whether  such  legisla- 
tion is  or  is  not  constitutional,  it  is  plain  that  if 
legislation  is  to  be  adopted,  the  desirability  of  uni- 
form rules  and  the  certainty  of  conflicts  of  au- 
thority under  any  other  system,  tend  strongly  to 
support  the  conclusion  that  a  regulation  plan  of 
national  scope  is  to  be  preferred.  Recent  episodes 
connected  with  efforts  to  apply  State  supervision 
plainly  show  that  at  present  the  separate  author- 
ity of  each  of  the  forty-six  States,  or  so  many  of 
them  as  may  be  traversed  by  the  lines  of  a  par- 
ticular company  cannot  be  invoked  in  this  behalf 
without  conflict,  confusion  and  economic  loss.  It 
seems  essential  that  one  authority  should  have 
sole  jurisdiction, — and  that  this  should  be  brought 
about  either  by  an  arrangement  between  the 
states,  or  by  the  assertion  of  exclusive  jurisdic- 
tion by  the  federal  government. 

THE    DUTIES    OF    BOARDS    OF    DIRECTORS    OUGHT 

NOT  TO  BE  DELEGATED  TO  A  COMMISSION, 

SEMI-POLITICAL  OR  OTHERWISE. 

Another  consideration  seems  now  of  vital 
importance.  The  labors  imposed  upon  many 
of  the  public  agencies  established  during  the 
past  twenty  years  for  the  enforcement  and  ad- 
ministration of  regulative  laws  applicable  to 
carriers  and  other  public  service  industries  seem 
to  exceed  practicable  limits. 


6o 

The  Interstate  Commerce  Commission  have 
advocated  a  valuation  of  all  of  the  railways,  and 
have  requested  Congress  to  place  with  the  Com- 
mission control  over  the  issue  of  capital  securities, 
but  they  have  not  suggested  a  method  for 
determining  the  value,  and  they  have  not  dem- 
onstrated the  necessity  for  either  a  valuation  or 
for  federal  control  over  the  issue  of  capital 
securities. 

The  Commission  claim  they  now  have  control 
of  the  capitalization  of  the  railways,  through 
their  system  of  accounts.  The  system  of  operat- 
ing accounts  promulgated  by  the  Commission 
have  been  in  effect  since  July  i,  1907,  or  about 
three  and  one-half  years.  Therefore,  it  would 
be  well  to  ascertain  the  effect  of  the  accounts 
promulgated  by  the  Commission  to  determine 
whether  they  protect  the  investors  in  railway 
securities  as  well  as  the  public ;  and  whether 
additional  security  could  be  had  either  by  a 
valuation  of  all  of  the  railways  or  by  federal 
control  of  the  issue  of  capital  securities,  or 
whether  this  can  be  more  effectually  accomp- 
lished in  some  other  way. 

Some  of  the  rules  included  in  the  system  of 
accounts  will,  during  the  next  few  years,  be 
proven  to  exert  a  greater  effect  detrimental  to 
the  continued  development  of  the  railways  than 
has  depended  upon  any  question  previously 


6i 

considered  by  the  Commission,  -or  than  would 
be  caused  by  an  adverse  decision  in  the 
important  rate  cases  now  pending. 

The  principles  advocated  by  the  Commission 
are  not  new,  but  are  largely  those  which  have 
been  followed  in  former  years  by  railways  com- 
monly referred  to  as  strongly  established  and 
conservatively  managed.  However,  it  was  not 
then,  nor  is  it  now,  prudent  or  possible  for  the 
weaker  roads  to  adopt  the  same  financial  policy  as 
is  followed  by  the  stronger  roads.  Doing  so  would 
undoubtedly  either  throw  the  weaker  companies 
into  bankruptcy  or  seriously  impair  their  credit. 

For  illustration  :  A  road  that  has  but  slight 
margin  over  and  above  its  fixed  charges  and 
four  per  cent,  on  its  stock  may  find  it  necessary 
to  reduce  its  grades  and  make  other  extensive 
improvements  to  increase  the  capacity  of  the 
line.  .While  the  change  may  double  the  capacity 
of  the  track,  some  time  must  elapse  before  the 
traffic  is  doubled.  Therefore,  while  the  manage- 
ment might  be  justified  in  increasing  its  fixed 
charges  to  the  extent  of  the  interest  on  bonds 
issued  to  pay  for  these  improvements,  it  prob- 
ably would  not  find  it  possible,  as  required  by  the 
rules  of  the  Commission,  to  charge  to  operating 
expenses  fifty  or  sixty  per  cent,  of  the  cost  of  the 
new  construction,  as  making  this  large  charge 
to  operating  expenses  would  correspondingly 


62 

reduce  the  income  available  for  fixed  charges  and 
dividends.  The  result  would  be  that  the  dividend 
of  four  per  cent,  would  neither  be  earned  nor  paid 
and  the  securities  of  the  Company  would  no  longer 
be  legal  as  investments  for  insurance  companies, 
trust  funds  or  savings  banks.  This  would  not 
only  seriously  affect  the  ability  of  the  company 
to  market  its  new  securities  but  it  would  also 
seriously  impair  its  credit,  in  New  York  State  for 
not  less  than  five  years  and  in  Massachusetts  for 
not  less  than  ten  years. 

Some  of  the  State  Commissions  have  had 
supervision  over  the  issue  of  new  securities. 
They  have  found  it  neither  desirable  nor  possible 
to  lay  down  hard  and  fast  rules  to  be  adhered  to 
alike  by  all  railroads ;  but  they  have  found  that 
the  causes  for  increasing  the  capital  securities, 
the  kind  or  class  of  securities  to  be  issued,  and 
the  prices  at  which  they  are  to  be  sold,  vary,  and 
necessarily  so.  Are  the  Commissioners  in  a 
better  position  than  the  several  Boards  of  Direc- 
tors to  pass  judgment  upon  all  the  factors  enter- 
ing into  the  price  of  securities  ?  It  must  be  borne 
in  mind  that  the  members  of  the  Boards  of 
Directors  are  in  close  touch  with  the  properties 
and  that  generally  they  are  men  who  are  fully 
acquainted  with  the  many  factors  affecting  the 
relative  prices  of  securities,  as  well  as  those  affect- 
ing the  general  market  for  securities  of  all  classes. 


63 

Also  the  recent  settlement  of  suits  brought 
against  the  directors  of  certain  national  banks  of 
New  York  City,  indicates  that  the  liability  of  the 
directors  of  a  corporation  are  too  great  to  justify 
the  assumption  that  they  are  likely  to  knowingly 
commit  a  wrongful  act  or  neglect  to  perform  the 
duties  of  their  office — and  especially  is  this  true 
of  the  railroads  engaged  in  interstate  commerce, 
members  of  the  Boards  of  which  are  usually  men 
of  high  standing.  Is  it  likely  under  these  cir- 
cumstances that  the  judgment  of  a  semi-political 
commission  will  be  better  than  that  of  the  Board 
of  Directors? 

In  this  connection,  consideration  must  be  given 
to  the  probable  effect  on  the  credit  of  the  corpora- 
tion of  a  failure  to  sell  the  securities,  due  to  the 
price  fixed  by  the  Commission  being  too  high  or 
the  terms  too  onerous  ;  also  to  the  loss  likely  to 
be  sustained  through  delays  on  the  part  of  the 
Commission  preventing  the  sale  of  the  securities 
until  there  have  been  substantial  reductions  in 
the  market  prices  of  all  securities. 

The  great  importance  of  this  question  is  best 
understood  by  those  familiar  with  the  amount 
of  new  securities  issued  each  year,  and  in  this 
connection  there  is  submitted  the  following 
data  taken  from  the  Annual  Reports  of  the 
Commission,  showing  the  railroad  securities  out- 
standing on  June  3oth,  for  the  ten  years  1899 


64 

to  1908  both  inclusive,  and  the  increase  therein 
during  the  year : 


Year. 

Stock. 

Bonds. 

Total. 

Increase 
during  Year. 

1899... 
1900... 
1901... 
1902... 
1903- 

$5,5T5.oil,726 

5.845.579  593 
5,806,566,204 
6,024,201,295 
6,155,559,032 

$5,518,943,172 
5,645.455,367 
5,881,580,887 
6,109,981.669 
6,444,431,226 

* 

$11,033,954.898 
11,491.034.960 
11,688,147,091 
12,134,182,964 
12,599,990.258 

1215.400867 
457.080  062 
197.112.131 
446,035,873 
465,807,294 

Average 

$5,869,383,570 

$5,920,078,464 

$11,789,462,034 

$356,287,245 

1904.. 
1905.. 
1906.. 
1907.. 
1908... 

$6,339.899,329 
6,554.557,051 
6803.760,093 
7.356.861,691 
7,373,212,323 

$6,873,225,350 
7  250,701,070 
7,766661,385 
8,725,284,992 
9,394,332,504 

$13,213,124,679 
13-805,  258,121 
14.570,421,478 
16,082.146,683 
16,767,544,827 

$6r3,  134,421 
592,133,442 
765.163,357 
1.511,725  205 
685,398,144 

Average 

$6,885,658,097 

$8,002,041,060 

$14,887,699,157 

$833,510,914 

*  1898—110,818,554,031. 

Trusting  that  some  of  the  thoughts  outlined 
above  may  be  useful  to  your  honorable  Commis- 
sion, and  thanking  you  for  the  opportunity  to 
present  the  same,  believe  me 

Very  truly  yours, 

W.   H.   WILLIAMS. 

Enclosures  : 

"Valuation  of  Public  Service  Corporations," 
by  W.  H.  WILLIAMS. 

"  Freight  Rates," 

by  C.  S.  SIMS  and  W.  H.  WILLIAMS. 


C9378A] 


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